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Financing Poor with Microcredit Some Opportunities and Challenges

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					 PAPER TO BE PRESENTED AT THE ASIAN REGIONAL CONFERENCE
                   jointly organized by INASIA and CDF
                                      on
    “The Potential and Limitations of Economic Initiatives in Grassroots
   Development – Current Issues and Asian Experiences” from 27th - 30th
                               November 2000
                                    at the
    BRAC Centre for Development Management (BCDM), Rajendrapur,
                                Bangladesh.




                               Paper 1



 Microfinance NGOs in Bangladesh
  Growth, impact and challenges



Country: Bangladesh
NGO: BRAC

Author of Workshop Paper:
Fazle Hasan Abed, Founder Executive Director, BRAC


Person Presenting the Paper at the Workshop:
Fazle Hasan Abed, Founder Executive Director, BRAC




                                   1
                            I. MICROFINANCE

Microfinance, also known as microcredit, has emerged as a movement in Bangladesh
and in the larger part of the world. There has been unprecedented growth of
Microfinance NGOs in this country over the past two and a half decades. Bangladesh
can be considered birth place of the current concept of Microfinance. This country
provides models of recognised global significance in several aspects of Microfinance,
viz., scale of operation, modes and practices of Microfinance, wider financial services,
and poverty alleviation. The experience of Bangladesh is increasingly being replicated
in many developing countries. The sector is now in transition in terms of process and
operational strategies. At the same time, it is encountering some challenges which
need to be addressed. This paper discusses growth of the sector, its impact and some
upcoming issues including the challenges. The discussion is focused on the
Microfinance NGOs which are the major actors in this field. The experiences of
BRAC are reflected in the discussion.

Microfinance -- main features

Microfinance, in simple terms, can be described as small loans offered to poor
households to foster self-employment and income generations. The loans largely go to
rural landless, disadvantaged women and marginal farmers who depend largely on
selling their labour. The terminology of Microcredit has undergone a change in recent
time. Practitioners in many countries call it microfinance for its wider dimension.
microfinance generally involves the following features:

   Small loans, for both working capital and assets
   Collateral free, substituted by group guarantees or compensatory savings
   Access to repeat and larger loans
   Intensive supervision and close monitoring
   Secure savings products
   Loan period generally for one year, may go up to 3 years
   Options available for weekly/monthly installment payment
   Can combine social development with financial intermediation.

Around 60 million people in Bangladesh, nearly half of the country‟s population, live
below the poverty line. But the poor did not practically have any access to institutional
credit, primarily because they are not considered credit worthy. So they could not
borrow from the banks or other financial institutions. The informal money market
including the traditional moneylenders provide loans but charge exorbitant rate of
interest. microfinance thus found a space to operate for the poor.

Growth of microfinance sector

Microfinance has attained rapid growth in Bangladesh. It has emerged as a potent
instrument of poverty alleviation. Both private and public sector organisations are


                                           2
involved in microfinance. The constituents of the sector include Grameen Bank,
NGOs, Bangladesh Rural Development Board (BRDB) which is a public sector
organisation, nationalised commercial banks and some other government
programmes. The Grameen Bank and NGOs are however, the leading actors in this
field. Total participants in the microfinance programmes in Bangladesh stand above
13 million (Rahman: May 2000). Around 9 million of them are enrolled in NGO
programmes. There are around 15,000 NGOs registered in Bangladesh. Of these,
nearly 1000 NGOs are dealing with microfinance. In 1999, NGOs alone disbursed
around US $ 400 million as credit. This speaks of the significant role the
microfinance NGOs are playing in Bangladesh. Table 1 presents the size of active
participants, cumulative disbursement and savings in the major microfinance
operators in Bangladesh.

Table 1: Microfinance in Bangladesh up to December 1999

 Orgaisation category              Number of       Net savings        Cumulative
                                   participants    (Taka/millio      disbursement
                                    (million)           n)          (Taka/million)
 NGOs (533)                            9.44           6,921              92,436
 Grameen Bank                          3.36           9,679             123,035
 BRDB (Public sector                   1.65            NA                15,855
 organisation)
 Total                                 13.35         16,600             231,326
                                                     ($ 330        ($ 4.627 million)
                                                    million)
Source: CDF Statistics, Vol. 9: 2000           NA= Not available

Microfinance has evolved into an important sector of development. There are
variations and clusters within the sector. For example, there are (a) wholesalers like
Palli Karma-Shahayak Foundation (PKSF) that conduits loans to borrowers through
NGOs; (b) large NGOs like BRAC, ASA, Proshika, etc, which moved from credit
retailing to wholesaling as well; (c) Grameen Trust, a subsidiary of Grameen Bank
(GB) that has lent money to NGOs in 20 countries of the world to replicate the GB
model; (d) the government which loans through its channels especially to Bangladesh
Rural Development Board (BRDB) and (e) nationalised commercial banks. There are
differences regarding interest rates and conditionalities among the actors. Changes are
taking place in the process and operational strategies of the actors which have been
elaborated in the paper.

Growth of microfinance NGOs has led to the establishment of two new institutions in
Bangladesh. One is Palli Karma-Shahayak Foundation (PKSF) set up by the
government as a private foundation to provide credit fund to NGOs. The other is
Credit and Development Forum (CDF) which is a networking NGO. CDF provides
need-based training and customised service to its member NGOs. By providing credit
fund, data base and training support, the two institutions are extending very useful
support to NGO microfinance programmes.

BRAC in microfinance



                                          3
BRAC is the largest national NGO in Bangladesh. It is also the largest development
organisation in the private sector in this country. A brief sketch of BRAC‟s
microfinance activities is added here as its experiences have been used in this paper.
In terms of membership enrollment (3.6 million), BRAC can be regarded as the
largest microfinance organisation in Bangladesh. The organisation has also been
operating large programmes in health, education and some other activities along with
microfinance. BRAC programmes are targeted to the poor and focused on women. A
total of 400 upazilas or sub-districts out of 464 of the country, are covered by BRAC
programmes.

BRAC‟s microfinance activities are operated through its Rural Development
Programme or RDP. The nucleus of RDP is the village organisation (VO). A VO
comprises 40-45 rural poor as members. As of June 2000, RDP had 3.6 million active
VO members. Around 97% of the members are women. The members have
accumulated Tk. 3,480 million (US $ 70 million). A total of Tk. 47,340 million (US $
1050) has been disbursed to the borrowers as loan. RDP comprises two broad type of
activities - economic development and social development. RDP lays importance on
enterprise development of the borrowers which is supported by credit, training, input
and extension support and often marketing assistance. The social development
activities comprise elements of essential health care and awareness development on
social issues including legal rights. Table 2 presents the package of BRAC‟s
microfinance interventions. The services are provided through each RDP Area Office
which comprises around 6000 VO members.
Table 2: Services provided by a typical RDP Area Office

 a)    Savings and Credit
        Compulsory savings
        Income generation and housing loans
        Life insurance

 b)     Sector Programmes
        Poultry & livestock
        Fisheries
        Sericulture & silk development
        Social forestry
        Agriculture extension

 c)    Social Development
       Essential health care
       Education
       Environment awareness
       Formation of federation of VO members
       Group theatre
       Gram Shabha
       Human rights and legal services

Source: BRAC Annual Report 1998


                                          4
5
                 II. IMPACT OF MICROFINANCE

Microfinance has generated considerable hope and expectations among the academics,
policy makers of the government, NGO leaders and other development practitioners in
Bangladesh. It has created positive impacts on two vital areas of national
development, viz., alleviation of poverty and women‟s empowerment. Microfinance
programmes in Bangladesh are targeted to the poor who make up nearly half of the
total population. Focus on women is another important characteristic of these
programmes. Women constitute around 90 percent of the total participants enrolled in
microfinance programmes. So the success of microfinance intermediation can be
ascertained by two significant indicators -- alleviation of poverty and empowerment of
women.

Impact on alleviating poverty
It is widely recognised that microfinance has proved to be a useful instrument of
fighting poverty in Bangladesh. A huge body of evidences based on empirical studies
has grown over the years on the effects of microfinance. Experience and evidences
indicate that microfinance has created quite a positive impact on the economic
condition of the borrowers and status of women in their households and local
community. The Bangladesh Institute of Development Studies (BIDS) has been
tracking poverty in Bangladesh for over last one decade. The BIDS survelliance
reveals that poverty has been declining by 1 percent annually. The number of people
living below the poverty line has now come down to 47 from the previous level of 80
in the early 1980s. While microfinance is not the only factor that has contributed to
this achievement, it is recognised to have played a major role.

A World Bank study has produced evidences of wide-ranging impacts of microfinance
on the condition of the borrowers (Khandker, 1999: 37-62). The study examined
programmes of BRAC, Grameen Bank and Bangladesh Rural Development Board
(BRDB), a public sector organisation. The findings revealed that per capita
expenditure has increased due to microfinance among the borrowers of all these
programmes. Household‟s net worth has increased too. A BRAC research examined
the impact of poverty in wider dimension. The results showed that 52% of the BRAC
member households were below the poverty line while a higher number (69%) of the
comparison households was lying below the line. The overall findings showed that
among the BRAC members there has been gradual improvements in the indicators
such as wealth, revenue earning assets, value of house structures, the level of cash
earned, per capita expenditure on food and total household expenditure (Husain, et al.,
1998: p xxiii-iv).

Empirical studies on microfinance programmes of two other large NGOs, viz.,
Proshika and ASA, produced similar positive impact. The impact assessment of
Proshika conducted in 1998-99 found positive results of its programmes in terms of
increased income, savings, school enrollment rate, reduction in infant mortality and
improvement in gender relations (Proshika : 1999). The impact assessment of ASA‟s
programme on its participants also showed positive results indicating an annual
growth of 5-7% compared to the control group, increase in food consumption,



                                          6
improvement in health and child education, and higher increase in assets (Bruntrup, et
al., 1997).

Can microfinance eradicate poverty ?

Despite these hard evidences some observers have raised questions about the efficacy
of microfinance in alleviating poverty. Their question is: If microfinance was so good,
how come it had not eradicated poverty (Chowdhury: March 2000). It is a fact that
poverty still prevails in the rural areas of Bangladesh, and all participants of
microfinance programmes could not cross the line of poverty. One has to keep in mind
that poverty is a complex phenomenon which can not be tackled by a single hyper-
needle intervention. The task demands multi-sectoral approach and a comprehensive
strategy. Microfinance can surely be a part of the board strategy, but it can not be the
only strategy. There have been undue expectations about microfinance because it has
wrongly been presented as a panacea for all economic ills. The fact is that
microfinance has met a very important need, and it has been able to alleviate poverty
only up to a certain level. What is needed now is shifting the overall sectoral strategy
to a growth driven approach. To achieve it, performance of the MFIs has to be
enhanced, and innovations for creative management, enterprise development, and
savings generation for capitalisation have to be a necessary part of action progrmames.

Impact on women’s empowerment

Removing gender inequity and empowering of the women has been a cherished goal
of the NGOs and many other development organisations in Bangladesh. Microfinance
has definitely created an impact on the women borrowers. A good number of studies
have examined the extent to which microfinance has contributed to women‟s
empowerment. Results of one study suggest that microfinance‟s largest impact has
been on the set of indicators relating to female control over assets and knowledge of
social issues (Zaman, 1999: 1-13). Loans given to women create better effect than
those given to men. Another study specifically indicates that “for every 100 taka lent
to a woman, household consumption increases by 18 taka; interestingly the figure is
11 taka if the same amount was lent to a man” (Zaman, 1998:3). Analysists came to
the conclusion that “a small amount of money works as a miracle in a cash-hungry
society and signficantly raises the woman‟s power in the family” (Zaman, 1998;
Hashemi et al., 1996 -- as cited by Chowdhury and Bhuiya, 1999:22). An impact
assessment of BRAC‟s microfinance programme indicated that the “value of impact
of credit is larger for the female category than it is for the males”. It was also found
that women‟s access to credit improves the households‟ well-being as their earning is
used mainly to meet the household needs (Husain, et al., 1998: iii).

Another study conducted at BRAC specifically examined the impact of microfinance
on poor women in respect of their mobility and social awareness. The findings
revealed that mobility of these women outside their home has increased. They also
gained some control on using their own income. In many cases the women
participated in decision making on household issues. They were also found to be
critically aware on issues relating to dowry, family and inheritance laws, family
planning, and education of their children (Zaman, 1999:1).



                                           7
Who uses loans - women or men ?

Some observers have raised questions as to who actually uses the loans issued to the
women borrowers. It has been asserted “that Microcredit programmes have worked
further to incapacitate and subordinate women” (Obayedullah, 7 August 2000). It went
further to state that “Women borrowers, in most cases, are used as a facade by men for
extracting loan money” (ibid). These are two extreme view points. Women are highly
disadvantaged in our male dominated society. They have long been living in extreme
poverty, massive health problems, ignorance and illiteracy. Bringing about basic
changes in their situation will depend on multi-sectoral interventions. As microfinance
alone can not eradicate poverty it can not also be considered “a magic wand for
empowering women or strengthening their position within a family or society” (ibid).
It happens at times that loan taken by a woman borrower is used by her husband or her
son living in the same family.

Our impact assessment study has indicated that 45% of the women are themselves
involved in income generating activities. A majority of them either depend on their
male household members for utiilization of their loan money or even hand over the
loan to them for investment. (Husain, et. al., 1998:177-78). The study further showed
that even in cases where the women do not utilize their loans by themsevles, they
enjoy a greater role in familial affairs as a provider of working capital and thus have
been able to improve their status within in household (ibid). Also their husbands often
consult them about how to spend the income accrued from their income generating
activities (ibid, p. 116). Under the condition prevailing in rural Bangladesh there are
both economic and cultural reasons for handing over loan money by women members
to their male counterparts. With substantial unemployment and under employment of
male household members prevailing among the rural poor, male employment is given
precedence over employment of women. These are some of the reasons why loan
money is often handed over to male members.

What is important here is to examine the type of control a woman has in investing the
loan money and using the profit earned. A woman is the part of her family. With
microfinance, not only a woman borrower but the whole family can be benefited if she
has control over decision making in certain areas of family affairs and in spending the
returns.

Has microfinance reached the ultra poor ?

It is a lesson learnt through experience that, all the poor do not benefit from
microfinance programmes. A question is very often raised : “If the Microcredit
programmes have not reached the poorest of the poor, so how far can it be effective
for poverty alleviation?” Some elaborations may be necessary to address the question.
One has to take into account that there is signficant differentiation within the ranks of
the poor. The poor can be classified as moderate poor, ultra poor, and vulnerable
poor according to per capita calorie intake. Households below the 1800-calorie line
are generally defined as ultra poor. It is observed that a larger portion of the ultra poor
has not been included in the microfinance programmes. Hulme and Mosley (1996)
estimated for Bangladesh that poorest 20% of the population were excluded from
most microfinance programmes. Some studies have examined why this has happened.


                                            8
Experience tells us that the problem of „self exclusion‟ is widely prevalent and that the
ritual of membership such as rigid attendance in meeting and obligatory savings
enhanced the „fears and timidities‟ of the extreme poor. The poor themselves do not
feel they can productively utilise the money to generate incomes to pay back loans.
They therefore self-select themselves out of credit programmes (BRAC:2000).
Successful microfinance operations require strict screening to ensure that money
borrowed can be repaid. NGO staff and even the group leaders are extremely careful
to screen out potential risks. Poor recoveries will reflect on overall group performance
and the performance of the NGO staff. So, households having some assets or some
steady incomes are more encouraged to join. This is the shared experience of all who
are dealing with microfinance operations.

Microfinance - with or without social development ?

It is debated whether microfinance alone can address the problems of poverty or some
broader interventions are needed to improve the economic condition of the borrowers.
MFIs follow different approaches in providing microfinance. In a simplistic way, the
approaches can be termed as „credit alone‟, „credit plus‟ or „credit with social
development‟. In Bangladesh four large microfinance operators are BRAC, Proshika,
ASA and Grameen Bank. The first three are NGOs. Of these, BRAC and Proshika
carry on credit along with social development programmes. ASA is operating a uni-
dimensional credit programme. Grameen Bank‟s programme is also uni-dimensional
but this organisation supports some social development activities for its borrowers.

Proponents of credit-alone approach argue that the poor need capital, and if capital is
provided in the form of credit, they will be able to take advantage of some interactive
forces within the economy to improve their economic condition. This argument
however, negates the fact that there are many other factors which are equally
important for poverty alleviation. Take for example, the situation of health. A
government sponsored survey revealed that morbidity rate is not only high in
Bangladesh, it is higher among the women (181 per thousand) than in men which is
163 per thousand (Khan and Hossain, 1999:i-ix). Morbidity is also associated with the
eocnomic status of households. The study found that poor households, having monthly
income less than taka 1000 (US $ 20), have a morbidity of 215 per thousand which is
35% higher than the morbidity for the non-poor earning taka 3000 per month or
above. This suggests that a microfinance programme should address the health needs
of the poor for sustainability and greater impact of the programme. A mixed group of
NGO leaders and academics who discussed this issue in a special purpose workshop
held in Dhaka came to a conclusion: “There can be no difference of opinion that
livelihoods of the poor can not be sectoralised and addressed on one dimension only.
A social development is also necessary as a precondition for realising the full potential
value of credit and financial interventions.” (Wood and Sharif, 1997:41-58).

The argument is quite clear and valid. However, the financial implications of
implementing a combined strategy of microfinance and social development is quite
heavy. Programmes in primary health care, sanitation, a minimum level of basic
education involve huge cost. NGOs or other microfinance organisations will find it
too difficult to bear the cost of such programmes. Additional supports are needed for
running health care and education programmes.


                                           9
       III. EMERGING TRENDS AND CHALLENGES

Microfinance, which has steadily grown over the past two decades, is now in a state of
transition. The Credit and Development Forum Which is tracking the sectoral trends
of microfinance in Bangladesh has identified transitions in several aspects of the
sector. These are: (a) membership in the sector is increasing by 15% while
capitalisation (loans, grants, etc.) is increasing by 40% per year; (b) savings is growing
by 30% while capitalisation from various sources is declining; and (c) loan sizes in
real terms are increasing by a few percentage point every year.

The sector has also surfaced some challenges. Some of these are:

a.   Inadequate credit fund and growing demand of credit. How fund can be
     mobilised interally to meet the growing demand ?

b.   Sustainability of microfinance programmes. microfinance has involved several
     millions of the poor. Can the programmes be sustainable to protect their interests
     and meet their future needs?

c.   Governance and transparency. Critical questions are being asked about
     goverance and transparency of microfinance NGOs. How to retain and enhance
     the reputation of these organisations?

d.   Wider impact. Can microfinance make wider impact by bringing larger number of
     the ultra poor in the programme, provide, quality services, lead to enterprise and
     technology development, and capacity development of the NGOs?

The microfinance NGOs and also other MFIs have to address these challenges
effectively and efficiently to sustain their programmes.

How to meet the growing credit need

The urgent and most formidable task for the microfinance NGOs is to procure
adequate funds to meet their growing demand of credit. Donor‟s assistance which has
so far met largest part of the revolving loan fund is now declining. So the alternative is
to mobilise fund locally. It is estimated that demand for credit fund will be double in
the next five years. It will be a formidable task for the MFIs to procure such a huge
amount from internal market. The following table provides a current picture about the
funding sources of microfinance NGOs.




                                           10
Tabel 3: Funding sources of RLF of microfinance NGOs in Bangladesh

                                            December 1999
 Source                      Number of NGOs               % of total RLF
                              received fund
Member savings                     488                        25.38
PKSF                               122                        23.81
Local bank                          42                        11.33
International NGO                   53                         0.29
International donor                161                        18.82
Service charge                     340                        12.47
Own fund                           326                         3.79
Source: CDF Statistics, Vol 9

In 1999 the microfinance NGOs procured over 80% of their revolving loan fund
(RLF) from internal sources (Table 3). Contributions of international donors to the
RLFs was only 19.11%. It is encouraging to note that participants of microfinance
programmes themselves contributed nearly 38% of the total in the form of savings and
service charge.

Savings generation can be the most effective way to capitalisation. There is a mistaken
belief that the poor can not or do not save. The fact is people feel encouraged to save
if the financial institutions are appropriately structured and offer suitable savings
products. MFIs have introduced different models of savings products in Bangladesh
which include : daily savings, mandatory savings, contractual savings, and time
deposits. Through these diversified products a substaintial amount of savings is being
generated. For example, borrowers from Grameen Bank have saved over Bangladesh
taka 8 billion (USD 1 = BDT 55) while those borrowing from NGOs have saved
around BDT 6 billion. A larger amount can be mobilised with more innovative
strategies.

Capitalisation : BRAC’s innovative approaches

Mere mobilisation of savings can not meet all the capital needed for financing the
microfinance programmes in Bangladesh. MFIs must explore alternative strategies for
greater resource mobilisation. These may include borrowings from commercial banks,
soft loan from abroad and other ways. BRAC, for example, has recently initiated two
new ventures in this regard. The first one is the establishment of a bank under a
commercial Bank licence. This will be a bank in the conventional sense of the term
with only slightly modified objectives. The bank which is expected to go into
operation soon will be a funding source for microfinance programmes of BRAC and
other NGOs. More specifically, it will support small-scale enterprise development in
the rural areas which can generate new jobs for the poor. The second venture is raising
money from the urban sector by floating bonds. The money will entirely be used for
financing of microfinance programme for the rural poor. These are two completely
new devices in the microfinance sector in Bangladesh. It is extected that other
microfinance NGOs would go for exploring newer strategies.




                                          11
Microfinance and modern technogoly

Microfinance programmes in Bangladesh are not generally concerned with modern
technology. This is a weak part of the programme. The potential of microfinance to
improve lives of the poor on a sustainable basis has been held back by the virtual
absence of modern production technology. Micocredit has largely been used for
traditional activities, and not enough has been done to introduce new technology. The
profit made from traditional activities may be modest, but not enough to generate an
investible surplus. BRAC has made significant commitment towards technology
transfusion in its programme through skill development training, improved raw
materials, extension and marketing support to a number of sectoral activities.
Examples are : high yielding vareties of birds, vaccination, hatcheries, and chick
rearing units in poultry; artificial insemination in livestock; fish hatchery
development, seed multiplication, tissue culture and use of hybrid seeds in crop
production; improved variety of mulberry trees, quality production of cocoons and
modern reeling facilities for sericulture. There is enough scope and need for linking
the modern production technologies with microfinance. This can create impetus to
enterprise development supported by microfinance. Modern technology, coupled with
enterprise development, will create a new course of microfinance in Bangladesh.

Development and adoption of technologies at a wider scale involve additional costs.
Financing of technology development is a big issue. Technology is necessary but
NGOs will find it really hard to meet the costs if special fund provisions are not made.
Adoption of new and improved technology at the users level involves necessary
training, procurement and supply of the materials. Borrowers of microfinance
programme can bear a part of the costs, but not all the costs. The state and
international development agencies have a role to play in this regard.

What can be done for the ultra poor?

Two decades of microfinance experience has generated the learning that NGOs are not
unable to bring all poor in their fold, but that microfinance in its present structure and
components is not necessarily the way out for the poorest. Experience also suggests
that normal microfinance programmes can not attract the extreme poor. Special
programmes with start-up support, training in marketable skills, credit, and essential
health care can be a useful development package for this group. It has also been
observed that if safety nets and wage employments are provided the ultra poor could
be attracted towards credit facilities.

A large number of people, over 25 million or so, are known to ultra poor. BRAC has
developed a spcially designed programme known as Income Generation for
Vulnerable Group Development (IGVGD) Programme. Targeted to ensure sustainable
livelihoods of the poorest women, the IGVGD is an innovative programme introduced
in 1988. The government of Bangladesh introduced the vulnerable group development
(VGD) programme in 1975 with the support of World Food Programme. Through this
programme each VGD cardholder draws 30 kg of free wheat per month for a period of
18 months. BRAC developed the IGVGD programme through an experimental project
to create a pathway of sustainable livelihoods for the VGD women. BRAC provides


                                           12
skill training, credit and other necessary inputs to these women. The IGVGD
programme has reached over 60% of upazilas in the country, and now covers more
than one million women. These women have graduated from the IGVGDP and joined
BRAC‟s Rural Development Programme that leads them to sustainable income. A
good number of studies have been conducted on the IGVGDP which testify that it is
an effective strategy to reach very poor populations. It has helped the poorest to
productively use credit, reduce their vulnerability and increase their economic well-
being.

Sustainability of microfinance NGOs

The initial group of NGOs started their work in Bangladesh with a missionary spirit of
helping the people who were affected due to the war of liberation in 1971. These
organisations lacked in professionalism or concept of modern management. Many of
these organisations later started working with socio-economic development including
microfinance. Sustained flow of foreign aid helped in their rapid growth. But the
resource base of these organisations are still very weak. The microfinance NGOs have
now become quite concerned about meeting their demand of credit fund. The path of
sustainability will not however, be easy to trod for most of these NGOs.

Sustainability of microfinance NGOs depends on three major factors: (a) sustainability
of the organisation, (b) sustainability of the microfinance programme, and (c)
sustainability of the borrowers. The most important and urgent issue is to achieve
financial sustainability. Some discussions have been made in the earlier part of the
paper as to how the microfinance NGOs can generate fund to finance their credit
programmes. But two other factors related to sustainability also need to be taken into
consideration. One of these is sustainability of the programme participants or the
borrowers. Enhancing profitability of the enterprises closely linked with developing
skills of the borrowers. Adequate provisions have to be made to develop requisite
skills of the borrowers through training and other supports. Management and
competence of the NGOs determine the quality of microfinance services and effective
implementation of the programme. Developing the capacity of the managers and staff,
people‟s organisations and the programme participants will continue to be the
determining factors of sustainability for microfinance NGOs.

Governance and transparency

The issue of governance and transparency is very crucial for the NGOs. More critical
questions are being asked now-a-days by observers and the press. Some of the points
of criticism appearing in the local press in recent times are as follows:
 The image of the NGOs has been tilted by the growing stigma of corruption, lack
    of accountability and transparency in spending and missue of donors‟ funds
    (Financial Express: 11 September 2000).

   In the name of microfinance the NGOs are setting up a parallel banking system.
    The high rates of interest they charge would not qualify them as cooperative
    enterprises ... many NGOs in the area [Naogaon] are fake and are defrauding the
    people.



                                         13
   “... donors have reduced their funding of several NGOs because of the latter‟s
    failure to use the money for the purpose it was given” (Daily Star : 6 September
    2000).

   “weak governance and management characterize most microfinance NGOs in
    Bangladesh. NGOs‟ boards are no less than rubber stamp boards in most cases ...
    They are mere onlookers and remain reticent on board‟s business” (Rahman,
    Holiday: June 15, 2000).

These are critical observations for the NGOs. Growth and sustainability of
microfinance programmes are closely related to governance. Essence of governance is
to ensure an overall system of structuring accountability and transparency in an
organisation. NGOs are people-centred organisations which can not be effective
without the trust of the people. Commitment, innovation and ability to work with the
poor at the grassroots have earned good will and reputation for the NGOs.
Transparency and practice of good governance will enhance this reputation and enlist
popular support.




                                        14
         IV. MICROFINANCE : WHAT’s IN FUTURE

Access to large-scale international assistance has helped a large number of
microfinance NGOs to grow in Bangladesh. Around 1000 NGOs, large and small, are
now involved in microfinance operation. Sustainability of most of these NGOs will be
at stake due to decline in international aid, intense competition for resources, lack of
professionalism and requisite competence. The coming years will look more to the
quality of services and products the MFIs provide to the borrowers, or they will be out
of service.
It is likely that there will be merger of smaller microfinance NGOs with the bigger
ones as it is happening in the case of many banks and financial institutions in different
parts of the world.

Not only mandatory deposits or time deposits, but many other kinds of savings
services including insurance will be developed. The package of financial services will
have to be bigger than what is in place. For example, the microfinance institutions
may develop social sector loans such as loan for education of children. The
microfinance sector will also develop loan products and technical services for small
and medium scale entrepreneurs. Such support can foster job creation for the poor in
the rural sector.

MFIs will have to develop much more professionalism. They should be for-profit
commercial organisations. Some of the NGOs will be coverted to such type of
organisations and provide wider variety of financial services on commercial
principles.

Consultancy services are part of the modern concept of business management,
development of new commercial products and streamlining the financial services.
Bangladesh has practically no capacity now to provide consultancy services. With
experiences and competence gained, Bangladesh can produce a large number of
experts to offer technical assistance to other countries.

The microfinance NGOs are now a turning point. One of the critical challenges facing
the NGOs is meeting the growing demand of capital fund vis-a-vis the declining trend
of interational aid. The existence of many microfinance NGOs will be at stake unless
they can generate adequate resources internally. One encouraging feature however, is
that the NGOs are now active in finding out alternative sources of fund. Some of the
big actors have diversified savings products, introduced cost-sharing devices for
services and other strategies. This is a good sign, but not enough to deal with the
complexities involved.

Microfinance has largely been used as a tool for alleviating poverty. The programmes
have shown that targets for poverty alleviation are both achievable and attainable. The
task however, is still unfinished. Microfinance will thus have to play a bigger role in
Bangladesh.




                                           15
Larger coverage of the ultra poor in the microfinance net is essential, but difficult. The
lesson learnt is that the ultra poor can not be attracted to credit unless an appropriate
development package is designed and introduced. BRAC`s IGVGD Programme which
has covered more than one million ultra poor women provides an illustration.

Small farmers can be among the potential users of microfinance. They have been
identified as “ tomorrow`s poor”. The small farmers are quite large in number and a
very productive force in our agriculture. Microfinance linked with modern technology
can improve their productivity as well as economic solvency.

There is yet another group who needs particular attention of the microfinance
operators. They are the „poverty graduates‟, who are members of NGO microfinance
programmes and have crossed the poverty line. They are capable to handle larger
enterprises. For this, they need larger amount of loans. BRAC has introduced a special
programme, viz., Micro Enterprise Lending and Assistance (MELA), to meet specific
needs of this emerging group.

Wider adoption of technology should be a major focus of future microfinance
operators. Modern production technology and enterprise development can increase
productivity and ensure better returns out of the credit investment. Technology
development is costly, but it will ensure sustainability of microfinance programmes.

The incidence of membership overlaps and intense competition for resources among
the NGOs are creating unhealthy atmosphere. It is also affecting the credit disciplines.
NGOs have to consider this issue more seriously. The NGO should be more alert
towards transparency in operations and governance.

Continuing search for customer-friendly products, innovations, and cost-effective
operational strategies must be ongoing for greater impact and sustainability of
microfinance programmes.




                                           16
                                  REFERENCES



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Hashemi, S. M. (1997). “Those Left Behind : A Note on Targeting the Hard-core
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                                        18
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         BRAC-ICDDR,B Joint Research Project Working Paper No. 18. Dhaka.




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