Modern microcredit, born in Bangladesh, was hailed as an innovative poverty fix when it appeared on the global radar. The United Nations dubbed 2005 “the year of microcredit,” and the following year, Mohammed Yunus and his Grameen Bank won the Nobel Peace Prize. Soon, however, the pendulum of hype swung the opposite direction, as scholars began to question the efficacy of microfinance. Critics pointed to high interest rates, over-indebtedness among poor borrowers, and even suicides by those struggling to pay off loans. Clients and institutions alike in countries such as India, Morocco and Nicaragua were shaken by crises of over-indebtedness and default.
And yet Bangladesh, birthplace of the movement, seemed to have dodged the bullet. In a report from the World Bank’s Consultative Group to Assist the Poor (CGAP), authors Greg Chen and Stuart Rutherford look back and examine the reasons why.
Bangladesh’s four largest microfinance institutions (MFIs) – ASA, BRAC, Buro and Grameen Bank – all followed a similar trajectory. Each experienced a period of rapid growth from 2004 to 2007, adding 15 to 28 per cent active borrowers annually. Then, in 2008, they all seemed to take a deliberate breather. With each acting independently, growth tapered off and some even pulled back. Why?
No one told Bangladesh’s biggest MFIs to stop the expansion of microcredit abruptly in 2008. There were no directions from regulators or government, nor recommendations from industry bodies. There were damaging cyclones in 2007 and 2009, but they were less severe than others in Bangladesh’s history, and their effect on microcredit was not serious enough to be part of decisions to slow growth. The dispute between Yunus and the government was still some years off and only came to the surface in 2011. Global encouragement was undiminished.
Before tackling these questions, Chen and Rutherford inspect the reasons for the four-year growth spurt. Bangladesh’s big MFIs were encouraged, in part, by the international enthusiasm for microfinance. They also each harboured ambitions to be national players; despite all being nonprofits, they were each rivalling to be the nation’s dominant microfinance provider.
They each seem to have spotted the brewing crisis, Chen and Rutherford write, for two reasons:
MFIs slowed their own growth in reaction to two main problems:
- First, they began to sense the negative consequences of market saturation of the core microcredit market.
- Second, they became more aware of the management problems created by the rapid growth of 2002 to 2007.
BRAC, for instance, realised its newly opened branches wouldn’t be able to recruit enough clients to break even, and thus began a host of reforms. It ended up reducing microfinance branches from 2,900 in 2008 to less than 2,200 by the end of 2012.
All four, meanwhile, began seeing an increase in loan delinquency. During the period of fierce competition and expansion, growth targets had sometimes overridden good judgment. Some clients were unable to repay their loans. The organisations reacted by slowing down and beefing up internal controls. ASA sent its executive floor from Dhaka to live in the field for months to fight delinquency. BRAC instated a pre-loan documentation that required staff to thoroughly investigate potential borrowers. It also required its branch accountants, who reported up a different chain of command than loan officers, to process loan disbursement paperwork and verify customers.
So why didn’t MFIs in other markets do the same when faced with similar circumstances? The authors provide several answers, suggesting there’s no simple one.
The fact that each of the Bangladesh “big four” are nonprofits, immune to commercial pressures from outside investors, may have something to do with it:
SN Kairy of BRAC remarks, “External investors are not interested in the same development goals as NGOs.” [Shafiqual Haque] Choudhury of ASA shares the same sentiment about his Bangladesh operations, “Commercially driven private equity would have made the situation worse leaving us unable to quickly correct the problems that emerged.” Whether these beliefs hold true is debatable, but they underscore a common Bangladeshi view about microfinance. It is true that while Bangladesh microfinance is increasingly commercially funded, management has not ceded governance control. We cannot say what would have happened had more outside investor interests played a role.
To be sure, there were likely other reasons, too: experience, for a start. All four had been operating for over 20 years, with the oldest, BRAC, founded in 1972, just after Bangladeshi independence. Faced with numbers that appeared rosy during growth periods, managers perhaps weren’t as fooled as their less experienced counterparts in other countries and other institutions.
And experience didn’t come only on the side of the lenders: Bangladeshi households, by now, had generations of exposure to microcredit. Zakir Hossain of Buro noted that his borrowers were more experienced and knowledgeable than his staff.
Finally, Bangladeshi MFIs used savings as a critical tool for managing credit risk for both themselves and their clients. For clients who cannot pay their loans, savings can allow them to exit without defaulting. Efforts to raise savings in other national markets were more restricted.
The authors end by identifying five trends that will define the next phase of Bangladeshi microfinance. Given its ability to avoid implosion during trying times, these trends are probably worth watching for anyone interested in the future of the microfinance movement:
- The core microcredit product is holding steady and evolving incrementally
- Lending to small enterprise will remain a significant market segment
- Client demand for savings services is increasing; but is inadequately met
- There is growing momentum to create a special category of deposit-taking MFIs
- Mobile phone payments services are developing rapidly