WB report praises big players’ effort to avert a crisis
Microfinance institutions (MFIs) come with pitfalls: their aggressive expansion plans can leave borrowers in an over-burdened state, according to a World Bank study released yesterday.
“Excessive lending into a saturated market could cause a ‘train crash’ that might cause great sector-wide damage and burden borrowers with debts they did not need,” the study said quoting a microcredit analyst.
The report—A Microcredit Crisis Averted: the Case of Bangladesh—found that one of the telling signs of a saturated market is rampant overlapping, or multiple borrowing, which is borrowing simultaneously from two or more MFIs by a single borrower. The study was conducted by Consultative Group to Assist the Poor, an arm of World Bank dedicated to financial inclusion.
The situation becomes untenable for many, contributing to serious deteriorations in welfare, such as reduced consumption, poor health, loss of creditworthiness or excessive stress, said Greg Chen and Stuart Rutherford, authors of the report.
The writers randomly interviewed 43 rural households in depth during the first quarter of 2013, all of whom took the services of MFIs.
“The interviews reveal a level of stress that the microfinance industry would do well to take more seriously, and to seek ways to reduce still further, perhaps by relaxing the mantra of zero tolerance on loan repayment schedules so that repayments fit more comfortably with the often irregular and unreliable incomes streams of poor households.”
The report also found that Bangladesh was on the verge of a microcredit crisis in 2008, due to a hard-line growth spurt between 2002 and 2007.
Towards the end of 2007, the supply by MFIs to their core targeted client segment of basic microcredit—loans to women from low-income households in rural areas—had come very close to saturation, the study found.
“Nearly every target rural household who wanted a loan already had one or more than one. Nearly every household had been a member or borrower at some time in the recent past.”
The report commended the country’s MFIs for their foresight and timely actions that averted the possible crisis—as experienced in Nicaragua, Morocco and India.
Sensing the danger, the big four MFIs—Grameen Bank, BRAC, ASA and Buro—which constituted two-thirds of microfinance supply for the past decade, stopped adding branches and staff around 2008.
“Long experience made them more alert to potential problems, but a long-term commitment to microfinance also motivated them to act early before problems worsened,” Chen added.
While performance from 2008 to 2010 did suffer, the sector was back on solid footing by 2011 and 2012 as a result of various actions each of the four MFIs undertook on their own, he said.
“This report correctly credits the microcredit industry in Bangladesh for slowing its growth in the face of market saturation and improving financial management,” said Hassan Zaman, chief economist of Bangladesh Bank. “It shows the maturity of the key players, which keeps up the tradition of responding to new challenges which is why Bangladesh is a global leader in this sector,” he said.
There is enough potential for micro-finance in Bangladesh and elsewhere, Zaid Bakht, research director of Bangladesh Institute of Development Studies, told The Daily Star.
Microfinance organisations need to upgrade their products rather than giving credit for traditional products, he said. “The government should provide market support for these products.”
Source: The Daily Star
