Interviewed by Syed Md. Rakeen, Team MBR

With over ten years of experience in the microfinance division of NGOs, Arefin Ahammed Diner has positioned himself as one of the more experienced heads at the SAJIDA Foundation. After completing his undergraduate studies, he has worked in multiple senior roles in finance and accounts at another leading NGO, Brac. In 2018, he completed his Masters of Science in Development Economics & Policy from the University of Manchester as a Chevening Scholar (the UK government’s global scholarships programme for future leaders, decision-makers and opinion formers). Team MBR was in conversation with Mr. Arefin Ahammed Diner and was fortunate enough to receive his take on microfinance institutions and their successes in Bangladesh.

Syed Md. Rakeen: According to the Microcredit Regulatory Authority (MRA), the disbursements of MRA-licenced microfinance institutions went incrementally higher in every fiscal year: BDT 1.36 lakh crore in FY20, BDT 1.51 lakh crore in FY21, and BDT 1.91 lakh crore in FY22. In your opinion, which key factors have been playing an instrumental role in the growth of microcredit financing?

Arefin Ahammed Diner: Asian Development Bank’s (ADB) report on Gender Equality and Social Inclusion Diagnostic for the Finance Sector of Bangladesh in Dec 2022 states that 65% of men in Bangladesh have bank accounts. On the other hand, only 35.8% of women have bank accounts. Then again, having a bank account and having access to formal financing are two different matters. In addition, out of the 7.8 million businesses in Bangladesh, 99.93% are CMSMEs, as per the Economic Census of Bangladesh Bureau of Statistics in 2013. Most of these CMSMEs don’t have access to formal financing. Microfinance institutions, different non-formal co-operatives or local non-formal credit means are the options these CMSME entrepreneurs avail for financing, creating a huge demand for non-formal financing. Nevertheless, MFIs require less paperwork, can process a loan within three working days, and MFIs have lower interest rates compared to any other non-formal financing methods. Finally, MFIs have the structure of a government regulatory body on their activities, which creates trust in the CMSME sector for non-formal financing through MFIs. Hence, the rapid growth of MFIs has been observed in Bangladesh.

Syed Md. Rakeen: The microfinance sector bounced back in spectacular fashion after two years, with a rise in microcredit services for agriculture, fisheries, cattle farming, and household-owned workshops. Would you kindly share the untapped industries that the microfinance sector can currently capitalise on?

Arefin Ahammed Diner: Rather than focusing on new or untapped industries, MFIs should work on creating new scientific solutions for the current methods. For example, climate-adaptive agriculture practices and products, loan products with agricultural insurance, wage-backed loans for factory workers, digital inclusion of MFI clients, and digital products through MFS wallets or other methods.

Syed Md. Rakeen: The availability of microfinance has enhanced financial inclusion, especially for women, with almost 90% of the clients of microfinance institutions being women. Despite impeding factors such as societal norms and cultural barriers, how did microcredit facilities manage to increase women’s participation in availing loans?

Arefin Ahammed Diner: Bangladesh is the pioneer in microfinance, and the model of group loans (especially for female groups) worked great for loans. There are a few reasons behind it. Firstly, female groups worked as social collateral in forms of respect and honour. A person not repaying the loan in the group was pushed by the group members themselves as the next disbursement of the group depended on the current loan repayment. Secondly, though the loan was provided to the female members but it was utilised by the income-generating person in most cases, which was a male (Husband or son of the borrower). In times of repayment, these females played a vital role in enforcing payment of the instalments. Females pursued the males to ensure that they saved money to repay the instalment payment in time. Finally, culturally, the females of Bangladesh are inclined to save. So, females being the group members ensured member savings and increased the savings propensity of our clients. So, due to the model of the Microfinance program, females became the core of the sustainability of the model.

On the other hand, only confirming over 90% of females in the client mix will not ensure the financial inclusion of females. There is a gender gap of 14% in mobile usage and a gap of 47% in smartphone usage, according to the report of Global System for Mobile Communication (GSMC) (Global System for Mobile Communications. 2020. Connected Women: The Mobile Gender Gap Report 2020). The report also says the gender gap in mobile internet use is 52%, and the gender gap in financial literacy is 27%. In addition, providing loans to females does have an impact on females’ influence, voice or control in financial decision- making in the household but cannot solely ensure it. MFIs are working on these factors now through different approaches. For example, catering loan products for females to purchase smartphones, female-centric savings schemes and so on.

Syed Md. Rakeen: Technological advancements in the financial services industry have massively facilitated the availability of loans in Bangladesh. From your perspective, how can microfinance loan channels be digitalised in a bid to offer more convenient, costfriendly, and faster microcredit services?

Arefin Ahammed Diner: MFIs’ operation is being digitised nationally. There are now various core loan management software available in the market, field officers are collecting instalments through collection apps, and various software exists nowadays to present data through a visual presentation for data- based decision making and so on. But digitisation on the customer end is still in the adaptation phase. Providing a service does not always ensure its use. Access to a smartphone is still very low to implement digitisation on the customer end or to propose digital products. MFIs are working on AI- based call centre solutions to make clients adapt to digital information and its use. In addition, MFIs are also working on digital passbooks. Initiatives like this will pave the way to cost-friendly, faster and convenient microfinance services.

Syed Md. Rakeen: Environmental hazards in recent years have prompted the dire need to incorporate green microfinance among the microcredit facilities with a view towards a more sustainable and low-carbon economy. In your opinion, which initiatives can help expedite the green microfinance initiatives in Bangladesh?

Arefin Ahammed Diner: Sajida is now working with partners to provide financing for EV bikes, replacing acid batteries with green and durable batteries. Currently, 3 million EV bikes are running on the roads in Bangladesh, which use acid batteries. Such batteries are not environmentally friendly, and the life cycle of such batteries is below one year. Replacing these batteries with green and durable lithium-ion batteries will reduce the emission of 1.5 kg of carbon per bike daily. This has the potential to reduce the emission of 1.6 million tons of carbon in a year.

Syed Md. Rakeen: Despite having a phenomenal impact on financial inclusion, MFIs generally charge a higher interest rate compared to formal banks and NBFIs. In your opinion, what measures can be taken to curb the interest rate, which is commensurate with the rate that is usually charged by the formal banks and NBFIs?

Arefin Ahammed Diner: As per the MRA guidelines, the maximum interest rate for a loan of MFIs is 24% declining or around 13.5% in the straight-line method. This is already very close to the rates of the banks or NBFIs. In addition, there are other costs (yearly service charge on outstanding, surcharges, account maintenance cost and so on) related to the disbursement of loans in banks, but in comparison, MFIs have no other costs. Bank funding has become very expensive nowadays, which impacts the MFIs’ funding cost, and the operation cost has always been very high for MFIs as MFIs require a higher number of field staff. Surely, with digital transformation, this operation cost will go down; hence, there will be room to reduce the interest rates too. The rates can also go down if MFIs can have access to alternate funding sources with more affordable pricing.

Syed Md. Rakeen: Non-performing loans (NPL) experienced an 85% YoY growth in microfinance institutions (MFIs) during the fiscal year 2021–22 owing to the detrimental effects of COVID-19, floods, the Russia–Ukraine war, and other economic shocks. From your perspective, what steps are required to shield the marginalised community from economic downturns?

Arefin Ahammed Diner: The best way to shield marginalised communities is to increase their resilience to economic shocks. Some steps are listed below:

1. Increase the resilience of marginalised communities by providing them with financial literacy so that they understand the power of savings in hard times.
2. Motivate them to diversify their income by being involved in various income-generating activities.
3. Train them with climate adaptive technologies and ensure investment in such technologies.
4. Cater Agri loan products with Agri-insurance.
5. Tailor development programs to increase the resilience of such communities.

Syed Md. Rakeen: According to the Daily Star, microfinance institutes in Bangladesh disbursed around BDT 900 crore each day and BDT 2 lakh crore each year in 2022, surpassing even the banks and NBFIs of Bangladesh. From your perspective, how can NGO MFIs continue the growing trend of the volume of microfinance activities in the future?

Arefin Ahammed Diner: As per MRA guidelines, MFIs can lend almost for all purposes, but MFIs are required to provide loans with innovative products that will serve the same purpose but in a modern way. Surely, digitising the loan process is the first step, which will result in a faster disbursement process and higher access. This will also reduce borrowing costs due to lower interest rates, resulting in more client onboarding. Secondly, tailoring products with current market demands, trends and issues. For example, investing in climate adaptive Agri loan products with Agri insurance will ensure growth for the agriculture portfolio and will also ensure a shield against natural calamities to farmers. Simple formation of loan products will not ensure growth; products that will address social issues along with the demand for financing of the marginalised communities will ensure growth.