Tapos Kumar Roy Senior Manager, Corporate Division and Mitali Saha Senior Officer, Corporate Division

Micro Finance Institutions (MFIs) have been playing a vital role in the socio-economic development of a country by providing financial services to those who do not have access to formal financial institutions. In Bangladesh, micro financing has its roots since 1970, when Dr. Mohammad Yunus established Grameen Bank. In the beginning, this sector was not formally regulated and there was no independent authority to supervise this sector. In 2006, almost three decades later of the initiation of microfinance in Bangladesh, as an independent authority Microcredit Regulatory Authority (MRA) was established. MRA (Law 32 of the year 2006) is the only legal entity that monitors and supervises NGO-MFIs operational activities of the country.

Activity status of MFIs in Bangladesh

At present 759 MFIs are operating in Bangladesh. This sector circulates around BDT 160,000 crore in the economy of Bangladesh with total loan outstanding of around BDT 90,000 crore. According to MRA Report Volume-2018, snapshot of MFI activities in Bangladesh is as follows:

Response of international MFIs to Covid-19 pandemic

MFIs serve about 140 million low-income people worldwide with savings and credit services as per MIX data. The value of MFI credit portfolio was $124 billion as of 2018. 80% of the customer base are women and 65% of the total customers live in rural areas. The COVID-19 pandemic has affected MFI activities for which MFI portfolio will slow down by 20% worldwide. Different international MFIs faced the challenges of the pandemic and initiated various measures such as:

Protecting People:
As a part of protecting people, many international MFIs have introduced rotation system and work from home facilities for staffs with online training to employees to aware them of new policies and procedures. All are advised to follow safety guidelines such as ensuring safe distance inside office, wearing masks and gloves especially while handling money etc.

Protecting Businesses
Most MFIs have prepared remote loan appraisals and adapted loans procedures to allow remote underwriting and disbursement. They also started Email, SMS and phone call campaigns to give people information about MFI activities in this pandemic. They also suspended the installments of April, May and
June and allowing clients to resume the reimbursement of their loans from July onwards. Emergency Loan or New COVID-19 business loan is launched in many countries for instance,

Adie-a French NGO, launched a new product called the Emergency Loan. The main features of this loan are, a 3-month grace period, reduced pricing, and no guarantor required.

Microfinance Ireland launched a new product comprising of loans within the €5,000 – €50,000 bracket aiming at supporting businesses with loan terms typically up to 3 years, no interest or repayment for the first 6 months, no fees and no hidden costs/charges, and fixed repayments with no penalty for early repayment.

Qredits-an international foundation (Europe based) is offering a bridge loan of €12,500 for 12 months. Moreover, two helpdesks were set up by them in response to the Covid-19 pandemic. One of which is for the loans and another one is offering the services of a Crisis Coach.

Microfinance Ireland, Qredits and Microlux-a Luxembourg based NGO applied the strategy of rescheduling and restructuring of loans to protect the business as well as the customers.

PerMicro-an Italy based MFI has been publishing government decrees on social media.

Effects of pandemic to MFI operation in Bangladesh

As general holiday was declared to avoid public gathering in this pandemic, the MFIs could not operate and collect loan installments from their clients for April & May. Also rural people, who make up majority of the clientele of MFIs, did not get loans during that period despite of a huge demand. Another issue is migrant members. Due to the pandemic, many urban members who were working in small organizations lost their jobs and shifted to their hometowns or rural areas.

At this moment, most of the MFIs are facing liquidity crisis as they could not disburse loans and collect installments for last few months. Moreover expenses
are mounting due to the adoption of different safety measures to operate in this pandemic situation. Maximum medium and small NGOs are already facing difficulties in paying full salaries to their employees. Due to this pandemic, number of new business entrepreneurs has declined by almost 45% and customer segment is also reduced by 53%. MRA circulated another notice on 23rd June, 2020 for not classifying the loans and pressurizing the customers
for collection up to September, 2020. Most MFIs think, this circular may cause a major collection crisis in this sector. If the situation continues, approximately 630 local NGOs (who usually have 1 to 5 branches) could possibly face extinction due to the ongoing crisis. 

Collection Scenerio amid Covid-19 spread in Bangladesh

As total operation of MFI was halted for the month of April & May, collection for those months was almost nil. Again, the collection started from June which is around 60-70%. We have sourced Collection ratio, disbursement target and achievement related information from some MFIs (including large and medium) for last 6 months through detailed interview sessions.

Profitability Impact

We can see the average NPL scenario of this sector collected from different NGOs’ before the epidemic below

Considering the current situation, it is certain that, NPL of this sector will rise because of non-repayment of installments and defaults. Due to the frozen operation, MFI’s targeted disbursement will not be achieved which will cause negative profitability. On the other hand, the MFIs are already facing collection problems which may also continue for a couple of months but other costs will remain same (operational cost, salary, infrastructure etc.) or increase in some cases, that would hit the profitability adversely. Moreover, most MFIs will think about maintaining the current portfolio rather than expanding. Thus, portfolio will remain constant or might reduce in some cases. This will eventually cause reduced profitability in the long run.

Strategy to overcome slow collection and managing liquidity

Managing Slow Collection

MFIs are now disbursing loans after extensive assessments and in this case some specific sectors like agricultural sector and small segment customers like grocery shops, food businesses, nursery/ horticulture etc. which are less vulnerable will get preference. They are also trying to persuade the good customers to make regular payment so that they can avail re financing from them at any point and according to several NGOs (JCF, SEBA, BASTOB etc.) they are receiving positive response from this. The customers who made regular payments before the pandemic and affected by COVID-19, MFIs are allowing a grace period of 2-3 months. This will help them to revive the business and make the payments. Besides, some encouragement programs are being introduced for the good customers like a discount/waiver on interest is offered to them on regular payment or upon successful closure of the loan, they are offered 10-15% more over previous disbursements etc. 

Managing Liquidity

Some special financial packages have been declared by the banks as well as government. Furthermore, PKSF has declared to disburse an additional amount of BDT 5,000 crore in micro credits to support small entrepreneurs impacted by Covid-19. Major portion of this fund will be provided by The World Bank and Asian Development Bank. PKSF, through its partner MFIs, will disburse the loans to around two lakh small entrepreneurs across the country. Another strategy to manage the liquidity is restructuring of the bank debt with grace period so that NGOs can get a breathing time to pay back the liability from their collection. As collection is the main lifeline of this sector, MFIs are more focused to improve their collection strategies and disbursing new loans based on the collection(around 60-65% of total collection) in order to maintain liquidity. Institutions are also focusing on internal financing by giving more attention to deposit collection from members.

A new and potential source of fund for MFIs could be Securitization of this sector. Different international MFIs operate in the capital market may also issue bonds for arranging long term fund. Government and MRA can work together to develop new law/rules in Bangladesh to open this sector in the capital market and allow them to issue bond either through public or private placement.

Response of MFIs of Bangladesh to COVID-19 pandemic

From the very beginning of this pandemic, MFIs in Bangladesh have initiated several steps and measures to sustain and fight the battle against the pandemic. For example, they are following safety guidelines in office by wearing masks, washing hands and maintaining cleanliness. Most MFIs reduced branch operation hours for customers. They also introduced Work from Home facility for staffs who can manage work in online. Large MFIs, such as BRAC, ASA and Sajida Foundation have arranged roaster plan for employees to attend office. BRAC has taken initiatives such as sending voice calls and letters from the senior leadership to keep the workforce motivated.

As there is a possibility that a percentage of MFIs’ loan portfolio may default due to pandemic, most of the NGOs are planning to Re-Structure loans in the coming days to retain the existing clients and portfolio. Some large and medium MFIs like BRAC, JCF, SDI, SKS Foundation etc. are disbursing minimum amount after strong assessment. Most MFIs are planning to disburse emergency loan to specific segment based customers who can manage the loan in this situation. Renowned NGOs like BRAC, JCF and medium range NGOs like SKS Foundation, SEBA etc. have decided to disburse maximum 60-70% of their collection (which was 85% before) to maintain the liquidity. In this pandemic situation most NGOs are focusing more on agricultural sector with some micro level businesses and restructuring their loan portfolio based on agro sector. Large and mid-level MFIs are still trying to pay off the bank loans, as their collection has resumed from June. To normalize the bank loan accounts and make regular debt payment, most NGOs are re-structuring their debt or rescheduling the bank loans.

Initiatives of government internationally and in Bangladesh against the pandemic

To revive the economy and to protect mass people from the effect of the pandemic, governments of different countries as well as Bangladesh have taken various initiatives, such as ensuring lockdown, creating social awareness, handing out aids and introducing wage subsidy packages. Different countries also declared various stimulus financing packages to revive the economy. Government of Myanmar has announced a financial support package with a value of 0.1% of their GDP. In Nigeria, the government has demanded the small businesses to be granted a one-year moratorium on all principal repayments. India has announced a $266 billion of rescue package. South Korea introduced $32 billion stimulus package. The US and Australian stimulus packages each represent about 10% of GDP. New Zealand’s program is about 5% of their GDP.

To revitalize the financial system and maintain cash flow in the market, our government has also announced different economic & financial action plans, such as:

Buy-back of government securities

Promotion of payment services. For instance, monthly transaction limit of Mobile Financial Services (MFS)has been increased from $900 to $2,300 and charges waived on withdrawal up to $12 per day

A refinance scheme of BDT 50 billion from Bangladesh Bank’s (BB) own source for agricultural sector in which customers will be able to avail up to 20% extra of the existing loan facilities under the scheme. BB will charge interest 1% from banks and banks will charge 4% from customers. The loan will be repayable within 18 months including 6 months of grace period.

Another refinance scheme of BDT 30 billion from BB’s own sources for low income professionals, farmers, micro businessmen. Loan limit to individual customer is BDT75k to BDT 3m. BB will charge 1% interest to banks, banks will charge 3.5% interest to MFIs and MFIs will charge 9% interest to customer. Customers will repay loan within 1 to 2 years including grace period.

Providing agricultural loan at 4% to the crop sector

Financial stimulus packages of BDT 72,750 Crore

Future prospects of MFI after pandemic and expectations from this sector

MFI sector is going through a tough phase which is quite usual for most of the business segments worldwide. After the pandemic, rural economy is expected to be decentralized and to boost which has immense growth prospects for MFIs. Being a developing country, our socio economic structure is largely focused on micro and SME businesses which could mostly be catered by MFIs. As formal banking system is not so controlled and scrutinized to cover the financing needs of root level people, there is no alternative of micro finance institutions.

Being a country full of natural resources, we need to focus more on agricultural sector. Out of our total budget in agricultural sector, 35% is implemented through micro finance sector. According to some MFI professionals, to make the agro sector more flourishing government needs to increase the allocation up to 50% in NGO sector. Moreover, to ensure fund utilization of financial packages which required to be disbursed to SME businesses, government can include the MFIs along with banks.

To make this sector more efficient and regulated, MRA is working on several projects. As MFIs have more controlled access to rural people and various micro and small level businesses, they are considered as the source of huge information. To utilize the vast information, MRA is working on data collection and analysis project which will help to derive diverse information regarding lifestyle, economy and research. MRA is also organizing another project titled as MF-CIB to update the CIB database of the members of MFIs which will help the NGOs to identify default members and avoid any unprecedented situation. The MF-CIB Rules-2020 has already been published in June 25, 2020 as a gazette in this regards.

After the pandemic, a major change will come in this sector which is digitalization (Digital Financial ServiceDFS). Before the pandemic, most of the NGOs worked manually and handled cash transactions which will change now. For the popularity of MFS, lion share of MFIs will operate with their customers through MFS. However, there are some issues with this digitalization process as fully digitization will require a strong cyber security system and also a disaster recovery center. There is a good amount of cost associated with establishing a disaster recovery center too. Moreover, it will also require assistance from the Government of Bangladesh, especially in the case of providing everyone with a NID (smart card) as soon as possible and combating the fraudulence of it. After that if the MFIs had access to the NID database, they could assure authenticity. On the other hand, agency cost in MFS in also high. Some large sized MFIs could bear the cost but it would be difficult for other mid and small sized NGOs to manage the cost. 

Bangladesh is the 8th most populous country in the world. As a developing country with this huge population, our main focus is to promote micro and SME businesses to utilize the limited resources and potential youth. Micro finance sector is playing pivotal role by supporting the agricultural sector as well as small enterprises and generating employment. Though MFIs are contributing not only to economic advancement but also social development of Bangladesh, the sector is still unrecognized and considered as the informal channel of financing. Sometimes NGO workers face different social harassments and bullying while working in the field. These issues need to be addressed by the regulators as well as the government so that the institutions can operate without any hurdle.