Introduction

Development of Microfinance Sector in Bangladesh

There is now greater competition in the microcredit market. As it is now far easier for borrowers to switch from one MFI to another and waiting times for accessing credit are far shorter than it was in the early 1990s. There are now more than 1200 MF NGOs in the country (CDF, 2004) among which approximately 200 NGOs have large microcredit programs being dominated by four large MFIs namely Grameen bank, BRAC, ASA and Proshika. As of December 2004, 721 of these NGOs reported loans to 16.62 million borrowers and micro entrepreneurs. These 721 NGOs are classified as MFIs. The rest can be termed as maximalist organizations (CDF, 2004). Microfinance NGOs in Bangladesh have generally overlooked the necessity to develop a progressive financial sector. However, the scale and performance of the microfinance sector is slowly approaching the banking system. Profits of MFIs are now recycled, there by fueling growth and providing NGOs with a cushion against risks entailed in growth. As a result of expansion of MFIs, a large proportion of extremely poor households, measured by initial landholder size, join microcredit program.

Table-1: Microfinance Providers and their coverage in Bangladesh Members No. of borrowers (m.) No. of active borrowers (m.) Outstanding loan portfolio (US$ m.) Member savings (US$ m.)

Big Four: Grameen Bank BRAC ASA Proshika Subtotal 3.6 4.5 2.7 2.8 13.7 3.95 4.03 2.77 1.54 12.29 1.25 803.63 237.62 196.37 11.55 1,249.18 46.36 212.87 118.87 46.2 24.75 402.64 39.24

PKSFs other 1.7

partners : Other NGO 3.9 MFIs Subtotal 5.6 Total 19.3 0.8 2.05 14.34 86% 54.64 100.99 1350.17 93% 22.19 61.42 466.66 87%

Big Four as % 71% of total

Source: World Bank (2005) The large majority of borrowers (86%) are clients of the handful of large organizations: BRAC, the Grameen Bank, ASA and Proshika (mentioned in Table-1). The four institutions combined have over $800 million in outstanding loans and around $380 million in savings. After the big four, the next largest NGO (Swarnivar Bangladesh) has 0.7 million clients and there are only ten NGOs who have more than 100,000 borrowers. The bottom line is that the majority of the MFIs are small (less than five thousand borrowers) and that the bulk of the access to microcredit is supplied by the four large MFIs. According to data gathered by the Microcredit Summit Campaign, by the end of 2003, Bangladeshi MFIs (including government bodies and commercial banks that offer some form of microfinance) had 21.2 million active clients, some 13.7 million of whom are undoubtedly poor women (Hume 2005).

Competitor providers Grameen Bank are:

BRDB

of

microcredit

except

Bangladesh Rural Development Board (BRDB), the largest microcredit provider of the government, has been working in the field of rural development, especially, towards poverty alleviation through cooperatives and non-formal group network throughout the country with the financial and technical support of the Government of Bangladesh and development partners. The target groups of the program include small farmers (holding up to 0.50 acre of land), and women and men without assets. Family planning, health and education programs are also included in the credit and training activities. BRAC

BRAC, established in 1972 as an NGO, started its microcredit program in 1990. Up to June 2005, a total amount of $2.28 billion has been disbursed as a microcredit to its targeted clients beneficiaries (98 percent women) in 64 districts through 1373 branches, and the recovery rate is 99.63 percent. As of December 2004, total borrowers of BRAC were about 4.5 million, which is 22 percent of total microcredit borrowers. The member savings of BRAC until December 2004 was $118.9 million. BRAC estimates that it contributes more than 1 percent to the GDP of Bangladesh. ASA ASA, established in 1978, started its microfinance activity since 1991. As a minimalist MFI, 97 percent of its more than six thousand employees are engaged in MF activity and its recovery rate is 99 percent. ASA provides two types of loans: small loans and small business loans. Small loans are given to women whose monthly income does not exceed $31 and who possess less than 50 decimals of cumulative land. The initial loan size is $62 to $93 and may increase by $16 to $31 per year. Its small business loan is usually given to men but given to women subject to demonstrating competence in business. At the end of the year 2004, the number of members in ASA stood at nearly 3.0 million. ASA disbursed loans of $1692.05 million by the end of 2004. ASAs own fund comprised about 30 per cent. Proshika Proshika, established in 1976, matches member savings with credit and provides technical and marketing assistance where needed. Initially it fulfilled its social intermediation objectives through group formation and consciousness raising, rather than service provision, but it has moved into the provision of a wider range of social programmers. Proshika is spread in 23,475 villages and 2,101 urban slums in 57 districts, PROSHIKA now works with nearly 2.75 million men and women members, drawn from rural and urban poor households, and has organized them into 146,798 primary groups with an average 19 members each. As there are on average 1.3 members from each household having 5.5 family members, this translates into over 11.64 million program beneficiaries of Proshika.

Grameen Bank of Bangladesh

Grameen Bank was established in 1983 by an ordinance; however, it started its activities in 1976 as an experimental project. Later it expanded the operation by organizing people without assets and providing them credit

support for income generation and capital and asset building. It is a specialized microfinance institution giving micro loans especially to women. At present GB works in 57000 villages with its countrywide1658 branches and reaching 5.3 million poor, 95 percent of whom are women. From foundation till June 2005, GB has disbursed $3.62 billion, $3.26 billion of which has been repaid and its members have saved $260 million in their savings accounts. The borrowers are to pay, from income generating loans, at a flat rate of 10 percent interest, which would be equivalent to 20 percent in the declining method. To provide financial services to the beggars, GB introduced in July 2002 a special program for them. The Grameen model has been replicated in several countries around the globe.

History
The development of Microfinance sectors in Bangladesh took place in several distinct phases over the last two decades. The origins of the current microcredit model can be traced back to action-research in the late 1970s to deal with the relief and rehabilitation needs of post-independence Bangladesh. At that time, many NGOs started as relief organizations but, over time, they turned into development organizations and gradually many of them have become MFIs by focusing on savings and microcredit programs. Microcredit was first initiated by Grameen Bank and was developed by a team led by Professor Mohammad Yunus. The Grameen-model, named as the 'Jobra' experiment was tested first centering on group based credit delivery with peer monitoring. During the late 1970s, when the 'Jobra' experiment was underway, the Dheki Rin Prokolpa was initiated by the Bangladesh Bank in collaboration with the Swanirvar Bangladesh, and several other pilot schemes were initiated by a handful of the NGOs which were active then. The 1980s witnessed a growing number of MFIs which experimented with different modalities of delivering credit to the poor. In the early 1980s several NGOs experimented with different ways of delivering credit. One important model tested was the efficacy of providing loans for groups 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. Even during the 1980s, in spite of Grameen Banks success, the main discourse amongst development practitioners in Bangladesh centered on the

desirability of microcredit programs as opposed to commercialization. However, during this period and early 1990s, NGOs developed management capacity and program design that helped them to expand their microcredit programs. The early 1990s was a period of rapid expansion of the Grameenstyle microcredit approach. The growth was picked up largely by a franchising approach whereby new branches replicated the procedures and norms that prevailed in existing branches. In the early 1990, unhindered experimentation in the fields led to a quiet resolution of the debate and the country experienced a massive expansion of microfinance activities during the 1990s. Donors contributed to the expansion of revolving loan funds, and PKSF was established around the same time to provide wholesale financial and technical support in the sector. The expansion of mainstream credit services continued rapidly through the mid-1990, while research and experience were contributing to the diversification of the sector to meet the needs of different client groups. In recent years MFIs have moved from the margins of the financial system towards the mainstream. There are a total of 19.3 million members, of which the big four MFIs counts 13.7 million (71 percent) members. But the total number of active members is only 14.3 million.

Market Power
The world is changing as we speak and will continue to so at an incredible speed. GBs main concern is to manage to eradicate poverty in the new future. They will continue with this task and will try to improve the situation in order to allow new opportunities to those who were brought up to think that they would always remain in poverty. GB wants to expand its financial system to the entire world; they dont want to eliminate the traditional system, but maintain both and lead to a better all round better economic climate. Its a long process from hard work to welfare; It should not be based on charity, dont give them fish, teach them to fish, they need to develop peoples skills to become self-sufficient and earn a decent living for themselves. Poverty should become a thing of the past and only glimpsed at in museums. If GB achieves its objectives there will be investors interested in helping towards this social impact, it could probably start as a small project and

develop gradually. News entrepreneurs would emerge, and with them, new activities, and more capital flow. Communication and technology are powerful tools to achieve a world of free agents, especially for those disadvantaged groups, deprived of a voice. We can say that Internet will help to make the difference. Some new projects had been carried out in Bangladesh those last years. An agreement with Danone (Grameen Danone Foods) to produce food for babies at a very low price (is already underway). Another project is the creation of eye clinics for cataract operations. This illness is very common due to malnutrition (this cause has nothing in common with the one of the developed country for the seam illness). As Mohammed Yunus said, in the Microcredit System we are trying spread our wings, we are starting new projects here and there. Some people think that our method is not safe; others think that is rough and others that it is not appropriate for the object in mind. But GB can guarantee the day will come when we will be ready to take off. We have achieved a world free of slavery, smallpox or apartheid, creating a world without poverty therefore seems plausible.

Credit Products offered in microfinancing

Credit is given for both individual and group activities and there is no collateral requirement. The types of loans include general loans, program loans, housing loans, etc. General Loans are made for any profitable and socially acceptable income generating activity, such as: rural trading; rural transport; paddy husking; food processing; small shops and restaurants and so on. Loans are usually between $15 to $160. However, members may take larger loans after repaying their first loan. Group members can obtain sector programmed loans in areas such as poultry, livestock, agriculture, sericulture, 7fisheries and social forestry. In these areas they are also provided with training, technical assistance and inputs. Members can also take one loan to construct or upgrade their homes. Besides, there are various forms of credit such as: flexible credit services, supplementary credit services, micro enterprise credit services, hand/emergency credit, disaster credit, sanitary latrine credit, tubewell credit etc.

Objectives
Currently, the main objectives of Grameen Bank are two: 1. Poverty reduction Through microcredits, they want to give to the most disadvantaged in society opportunities so that they can start a small business and generate a regular source of income, and so improve their standards of living and those of their families too. This is the main objective of GB. 2. The pursuit of economic and financial benefit of the institution That is, that the banks income (mainly those from the interest charged to customers) are sufficient to meet all costs of the organization: operating costs

and management, salaries and wages, cost of inflation and opportunity cost of capital. For GB reaching sustainability is a strategic objective. The Grameen Bank believes that credit is an effective method in the fight against poverty, as well as a driver of socioeconomic development status. According to the founder (Muhammad Yunus), all these millions of small groups people with their millions of small projects can lead to the miracle of development. That is, if the individuals can get access to credit, almost impossible for poor people through the traditional banks, they will be able to detect and implement viable economical activities and also to generate income that would allow them to quit the extreme poverty in which many of them are. The GB sees credit as a human right. They think that the financial systems should be built in a way that those that have nothing, could have the major priority to access to credit.

Question/Answer
Question 1: Critically discuss the reasons for the growth of microfinance as a global enterprise and the role of foreign capital in the sustenance of microfinance as a development tool. Ans-1: Microfinance means, providing very poor families, poor women and youth
with tiny loans to help them engage in productive activities or to run small sustainable businesses and thus to enable them to meet their basic needs such as: food, clothes, access basic health care, educate their children, improve their livelihoods and save a little at last towards a better future hence many of them in due course, pull themselves out of poverty. Microfinance is the most powerful tool identified to help the very poor, those living below $1 a day.

Microfinance is usually understood to entail the provision of financial services to micro-entrepreneurs and small businesses, which lack access to banking and related services due to the high transaction costs associated with serving these client categories. The two main mechanisms for the delivery of financial services to such clients are: 1. Relationship-based banking for individual entrepreneurs and small businesses; and 2. Group-based models, where several entrepreneurs come together to apply for loans and other services as a group. It is one of the better tools for poverty alleviation, economic growth and development in emerging economies. Here, loans offer the same benefits to major world economies that face growth problems. Over the past centuries practical visionaries, from the Franciscan monks who founded the community-oriented pawnshops of the 15th century, to the founders of the European credit union movement in the 19th century (such as Friedrich Wilhelm Raiffeisen) and the founders of the microcredit movement in the 1970s (such as Muhammad Yunus) have tested practices and built institutions designed to bring the kinds of opportunities and risk-management tools that financial services can provide to the doorsteps of poor people. While the success of the Grameen Bank (which now serves over 7 million poor Bangladeshi women) has inspired the world, it has proved difficult to replicate this success. In nations with lower population densities, meeting the operating costs of a retail branch by serving nearby customers has proven considerably more challenging. Hans Dieter Seibel, board member of the European Microfinance Platform, is in favour of the group model. This particular model (used by many Microfinance institutions) makes financial sense, he says, because it reduces transaction costs. Microfinance programmes also need to be based on local funds. The modern use of the expression "micro financing" has roots in the 1970s when organizations, such as Grameen Bank of Bangladesh with the microfinance pioneer Muhammad Yunus, were starting and shaping the modern industry of micro financing. Currently, microfinance services (loans, savings, etc.) are available to over 100 million of the worlds poorest families (Microcredit Summit Report, 2009). That may partially explain the decline in poverty rates over the last three decades. In fact, 5% of the clients of Grameen Banks pull themselves out of poverty each year thanks to loans and most of ACCION USAs microfinance clients created 2.4 jobs during 2008, when many businesses were downsizing.

From Different perspectives: From the non-profit donors point of view, it is the gift that keeps on giving. From the for-profit investors point of view, it is the expansion of the financial industry to the bottom of the pyramid to reach the poor and the poorest of clients who have the same desire, motivation and ability to be successful entrepreneurs and become good

clients of banking services. From the micro entrepreneurs point of view, it is having access to financial services where none or nothing reasonable existed before. Purpose of Micro financing The microfinance model, pioneered by the Grameen Bank in Bangladesh in the mid 1970s, addresses this impasse. By providing small loans to entrepreneurs and small businesses, the Grameen Bank has empowered the poor, giving them the resources to generate additional income, stimulate value creation and in turn development. It should be noted that the source of development here is not the result of a trickledown (or topdown) stimulus, but a bottom-up force, whereby the poor are empowered to, at the risk of using a clich, pursue their own destiny. Since the mid 1970s, there has been an explosion of activity in the microfinance sector. Several models have been developed, various services have been pioneered, and many international organizations have become involved. Today, there are over 7000 microfinance institutions worldwide, serving the borrowing and savings needs of over 54 million people and growing.

Question 2: Identify the features of microfinance as a global movement to address the issues of poverty and hunger at the base of the economic pyramid. Ans-2: The Main Features and the paradigm shift of the business approach of Grameen Bank Microfinance is discussed below: Grameen Bank Microfinance promoted credit as a cost effective instrument for alleviating poverty and targeted towards the lower class people of the society or the nation. It offered credit to the poorest of the poor and established credit as human right. The most prominent feature of Grameen Bank Microfinance is that the credit system does not force the borrowers to enter into any legal contract. The system does not emphasize on securing collateral, rather it is based on mutual trust.

Grameen Bank Microfinance aims at generating self employment among the poor through providing loans and targets overall social and economic development of the poor people of rural Bangladesh.

Grameen Bank Microfinance works in its own methodology. To receive credit from the Grameen Bank, the borrower is required to join a group of borrowers.

According to Grameen Bank Microfinance System, credits can be obtained on a sequential basis, but a borrower can get a new loan only after he repays the previous one. The loans provided by Grameen Bank Microfinance are required to be paid back in weekly or bi-weekly installment.

Grameen generalize system or GGS: it was unconventional because it deviated from its original strategy of loan disbursement and recovery procedure, looking back on Grameen banks system of prior to the introduction of GGS, which Grameen bank named Grameen classic system or GCS, weekly repayment started faltering as the size of the loans started becoming larger. Grameen bank apparently was looking for an exit to avoid huge defaults and the collapse of the system.

Flexibility: GGS allowed borrowers a tremendous flexibility in determining the size, the tenure, the installment and the repayment intervals, unlike the earlier weekly repayment system. GGS replace the compulsory group fund and emergency fund savings with a personal savings account.

Question 3: What may be the threats and constraints of microfinance as a new development paradigm when commercial capital is invested in it?

External analysis of the company: PEST analysis

During a field trip to a poor Bangladeshi village with his class in 1974, economics professor Mohammad Yunus interviewed a woman who had a small business making bamboo stools. Lacking the resources to purchase raw bamboo, she was forced to borrow small amounts of money from a local street lender, and without collateral, could only borrow enough to buy bamboo to build one stool at a time. After repaying the lender, often at an interest rate of over 10% per week, the woman was left with a profit margin of mere pennies. Had she had access to more favorable terms for her loan, she would have been able to save enough money to protect her from future uncertainties and to, in the long run, raise her above the subsistence level. Discouraged by what he saw, Dr. Yunus took matters into his own hands and lent a small amount to some 42 rural basket weavers. He found that these small loans went a long way, and that virtually all who had borrowed were keen to repay their loans. Dr. Yunus found that it was possible with this tiny amount not only to help [the poor] survive, but also create the spark of personal initiative and enterprise necessary to pull themselves out of poverty. Just two years after his field trip, Dr. Yunus established the Grameen Bank, an institution providing small loans to the poor,

especially women, in Bangladesh using innovative ways of getting around their borrowing constraints. The Grameen Bank has been hugely successful in generating sustainable livelihoods, reducing poverty and driving development in Bangladesh and has since grown to over 1084 national branches, in over half the villages of Bangladesh. Recognized as a huge success, the microfinance model pioneered by Dr. Yunus has been replicated and adopted in dozens of other underdeveloped and developing countries around the world. Today, there are approximately 7000 microfinance institutions serving over 54 million clients worldwide who have received US$18 billion in loans and accumulated US$13billion in savings.

Internal analysis of the company: SWOT Analysis

Conclusion
Poverty alleviation and the empowerment of women are two crucial issues confronting governments and development agencies around the world today. They have become arguably even more urgent in the face of current economic and environmental conditions exacerbating the hardships of many of the worlds poorest people. Since Muhammad Yunuss successful experiment in Bangladesh in the 1970s, microfinance, and its principal instrument, microcredit aimed primarily at women, have grown in scope and scale. Today various mainstream entities, including commercial and state banks, internetbased organizations, and insurance and credit card com-panies, have joined the microfinance bandwagon, offering poor people access to basic financial services. While microfinance will undoubtedly continue to play a vital role in socio-economic development, certain questions regarding both the efficacy and ethics of various applications of this approach need to be critically reevaluated. Analyzing cases from different parts of the world, workshop participants addressed these issues at the intersection of local populations and global forces. These on-the-ground analyses by investigators coming from both social science disciplines and microfinance organizations are an essential component in assessing the way forward for policymakers and development practitioners as they grapple with the very difficult and integrally related problems of poverty alleviation and womens empowerment. The participants in this workshop drew attention to areas in need of attention, and made suggestions for possible solutions. They showed how programs in

some places have had positive results, while pointing out how strategies must be adapted and modified to take account of local class, gender, cultural, and regional differences. As with any endeavor as complicated and daunting as poverty alleviation and gender equity, working out the best combination of approaches for different groups of people will take time and energy on the part of many different institutions and individuals. Interrogating assumptions, drawing on lessons learned from both successes and failures, and approaching the problems from many different perspectives, this workshop was one effort in the movement toward that goal.

References:
Journals
CDF (Credit and Development Forum) (2005), Microfinance Statistics, Vol.17, December 2004 McGuire, P.B, John D. Conroy, Ganesh B. Thapa (1998), Getting the Framework Right: Policy and Regulation for Microfinance in Asia. Brisbane: Foundation for Development Cooperation. Hashemi (2001), Linking microfinance and safety net programs to include the poorest: the case of IGVD in Bangladesh, CGAP Focus note 21. Hulme, D. (2000), Is Micro debt Good for Poor People? A Note on the Dark Side of Microfinance, Small Enterprise Development, 11 (1): 26 28. Hulme, D. And K. Moore (2005), why has microfinance been a policy success?

Bangladesh and beyond, Draft Report for Discussion World Bank (2005), The Economics and Governance of Non Governmental Organizations (NGOs) in Bangladesh, Consultation Draft Zaman, H. (2004.), The Scaling up of Microfinance in Bangladesh: Determinants, Impact, and lessons, World Bank Policy Research Working Paper 3398, September 2004 Mayoux, Linda, Womens Empowerment or Feminization of Debt?, One World Action Conference Report, March 2002.

Websites:

http://www.asabd.org www.microfinancegateway.org/viewpoint_outreach.htm

http://www.demographia.com/db-indivown.htm http://www.brac.net www.cdfbd.org http://www.grameen-info.org http://www.pksf-bd.org http://www.proshika.org http://wedreambusiness.org http://www.revistafuturos.info http://conferenciasnt.wordpress.com http://www.nantiklum.org

http://es.wikipedia.org
http://www.global.ucsb.edu http://www.irisyorku.ca