Origin of the Report

Now a day’s education is not just limited to books and classrooms. In today’s world, education is
the tool to understand the real world and apply knowledge for the betterment of the society as well
as business. From education the theoretical knowledge is obtained from courses of study, which is
only the half way of the subject matter. Practical knowledge has no alternative. The perfect
coordination between theory and practice is of paramount importance in the context of the modern
business world in order to resolve the dichotomy between these two areas. Therefore, for the
program we are assigned to prepare a report on “Microcredit in Bangladesh” for
Bangladesh Studies (F-105) course.

Page 1 of 33
 Objectives of the Report

 To relate the theoretical view with the practical view of microcredit activities.
 To increase our experience in data collection and analysis.
 To know the actual picture of microcredit activities in bangladesh.
 To know the role of microcredit in poverty eradication and in national economy.
 To suggest of the findings.
 Methodology of the Report

To prepare this report we mainly depend on secondary data. But also take some help from our
course instructor.

Procedure of collecting secondary data:

 Records and documents.

 Books, texts and publications.
 Wikipedia.
 Related Websites.
 Limitations of the Report

While preparing this report, we have faced some problems. The main problem was to co-ordination
all the group members. Moreover, during data collection we faced several problems.

 Due to limited access of the data, this study may not be perfect to the cent percent.

 Lack of enough experience in analyzing of data.

 Due to inadequate information, in-depth analysis could not be done in the report.
Chapter - One

Introduction
1.Introduction

1.1 What is Microcredit

A type of banking service that is provided to unemployed or low- income individuals or groups
who would otherwise have no other means of gaining financial services. Ultimately, the goal of
microcredit is to give low income people an opportunity to become self- sufficient by providing a
means of borrowing money.

1.2 Background of Microcredit

Early Beginnings

Ideas relating to microcredit can be found at various times in modern history. Jonathan Swift
inspired the Irish Loan Funds of the 18th and 19th centuries. In the mid-19th century, Individualist
anarchist Lysander Spooner wrote about the benefits of numerous small loans for entrepreneurial
activities to the poor as a way to alleviate poverty. At about the same time, but independently to
Spooner, Friedrich Wilhelm Raiffeisen founded the first cooperative lending banks to support
farmers in rural Germany. In the 1950s, Akhtar Hameed Khan began distributing group-oriented
credit in East Pakistan. Khan used the Comilla Model, in which credit is distributed through
community-based initiatives. The project failed due to the over- involvement of the Pakistani
government, and the hierarchies created within communities as certain members began to exert
more control over loans than others.
 Modern microcredit

Nobel laureate Muhammad Yunus, the founder of Grameen Bank, which is generally considered
the first modern microcredit institution.The origins of microcredit in its current practical
incarnation can be linked to several organizations founded in Bangladesh, especially the Grameen
Bank. The Grameen Bank, which is generally considered the first modern microcredit institution,
was founded in 1983 by Muhammad Yunus. Yunus began the project in a small town called Jobra,
using his own money to deliver small loans at low- interest rates to the rural poor. Grameen Bank
was followed by organizations such as BRAC in 1972 and ASA in 1978. Microcredit reached Latin
America with the establishment of PRODEM in Bolivia in 1986; a bank that later transformed into
the for-profit BancoSol. Microcredit quickly became a popular tool for economic development,
with hundreds of institutions emerging throughout the third world. Though the Grameen Bank was
formed initially as a non-profit organization dependent upon government subsidies, it later became
a corporate entity and was renamed Grameen II in 2002. Muhammad Yunus was awarded the
Nobel Peace Prize in 2006 for his work providing microcredit services to the poor.
Chapter - Two

Principles
2. Principles of Microcredit

2.1 Economic Principle

Microcredit is ideally based on a unique set of principles that are readily distinguished from trends
in the wider credit market. Microcredit organizations were initially created as alternatives to the
"loan-sharks" known to take advantage of clients. Indeed, many microlenders began as non-profit
organizations and operated with government funds or private subsidies. By the 1980s, however the
"financial systems approach," influenced by neoliberalism and propagated by the Harvard Institute
for International Development, became the dominant ideology among microcredit organizations.
Ironically, many microcredit organizations now function as independent banks. This has led to their
charging higher interest rates on loans and placing more emphasis on savings programs. The
application of neoliberal economics to microcredit has generated much debate among scholars and
development practitioners, with some claiming that microcredit bank directors, such as Muhammad
Yunus, apply the practices of loan sharks for their personal enrichment.

2.2 Group Lending

Though lending to groups has long been a key part of microcredit. Microcredit initially began with
the principle of lending to individuals. Despite the use of solidarity circles in 1970s Jobra, Grameen
Bank and other early microcredit institutions initially focused on individual lending. Indeed,
Muhammad Yunus propagated the notion that every person has the potential to become an
entrepreneur. The use of group- lending was motivated by economics of scale, as the costs
associated with monitoring loans and enforcing repayment are significantly lower when credit is
distributed to groups rather than individuals. Many times the loan to one participant in group-
lending depends upon the successful repayment from another member, thus transferring repayment
responsibility off of microcredit institutions to loan recipients.
 2.3 Lending to Women

Lending to women has become an important principle in microcredit, with banks and NGOs such
as BancoSol, WWB, and Pro Mujer catering to women exclusively. Pro Mujer also implemented a
new strategy to combine microcredits with health-care services, since the health of their clients is
crucial to the success of microcredits. Though Grameen Bank initially tried to lend to both men and
women at equal rates, women presently make up ninety- five percent of the bank’s clients. Women
continue to make up seventy-five percent of all microcredit recipients worldwide. Exclusive
lending to women began in the 1980s when Grameen Bank found that women have higher
repayment rates, and tend to accept smaller loans than men. Subsequently, many microcredit
institutions have used the goal of empowering women to justify their disproportionate loans to
women.
 Chapter - Three
Users and Suppliers Of
Microcredit
3.Users and Suppliers of Microcredit

3.1 Who are the Suppliers of Microcredit ?

The principal microcredit service providers in Bangladesh are usually categorized into four major
groups: NGOs, specialized institutions, commercial banks with microcredit programs and
administrative ministries or divisions . Although there are thousands of NGOs throughout the
country offering micro credits, many of them are very small in loan portfolio or number of
borrowers, and the majority of micro credit clients are being served by four huge Microcredit
institutions , namely Grameen Bank, BRAC, ASA and Govt. agencies & BRDB. The World Bank
estimates that in 2005 the four institutions combined account for 86% of all active borrowers and
over 90% of all outstanding loans in the Bangladesh Microcredit sector.
 Grameen Bank:

The Grameen Bank was established in 1983 under a special law with the initial support from the
Bangladesh Bank. It is the only MFI that has been awarded a license to operate as a special bank
for microcredit.
Grameen‘s poor borrowers own 95% of the bank‘s total equity . The remaining 5% is owned by the
government. According to the MIX Market, a leading microfinance platform, as of December 2008
Grameen Bank was the second largest MFI in Bangladesh with an outstanding loan portfolio of 642
million Dollars and 6.2 million active borrowers, of which almost all of them (97%) are women .
Grameen claims to be fully financially sustainable. It takes no donor funds, nor does it take any
loans from local or external sources, and finances its credit program solely through its clients
deposits, which amount to 142% of its outstanding loans. The bank, which operates with 2560
Branches in nearly 85000 villages, has a loan recovery rate of 98%. In 2006 Grameen Bank and its
founder, Dr Mohammed Yunus, were awarded the Nobel Peace Prize for their efforts to create
economic and social development from below.

Dr.Muhammad Yunus
Founder of Grameen Bank
 BRAC

BRAC was founded as a relief organization in 1972 after the liberation of Bangladesh . It initially
helped refugees returning from India and soon broadened its focus to long term sustainable poverty
reduction. Its holistic approach to poverty alleviation and empowerment of the poor include a range
of core programs in economic and social development, health, education, and human rights and
legal services. BRAC had 6.3 million active borrowers and an outstanding loan portfolio of 648
million Dollars in 2008 and was listed as the biggest MFI at the Mix Market both in terms of
borrowers as of loan portfolio size.

ASA

ASA was founded in 1978 and received formal registration from the government in 1979. Its
primary objective was to help the poor organize & empower themselves so that they would
establish their political and social rights for a just society. During this time, the members of ASA
conducted a series of social actions to fight against social injustices, gain their rightful access to
institutional and public resources, obtain just wages, enter into the local power structures and have
access to land . In the mid-80‘s ASA realized that in order to be able to assist the poor more
effectively, it would have to get into the business of microcredit. By 1992 it focused solely on
microfinance. ASA is registered as a non-profit social-welfare organization under the Societies Act
and remained an NGO throughout its existence .

Govt. agencies & BRDB

Bangladesh Rural Development Board (BRDB) is the lar gest microcredit provider of the
government. It works in rural areas and provides microfinance services mostly to cooperatives with
the support the financial and technical support of the Government of Bangladesh and its
development partners. The interest rates charged by the BRDB and other government programs are
too low because they don‘t have to meet the full costs of their operations. Nevertheless, BRDB has
disbursed US$ 520 million to cooperative societies and groups and reached about 3.6 million
members by 2004.
 3.2 Who are the clients of microcredit ?

Typical microcredit clients are poor and low-income people that do not have access to other formal
financial institutions. Microcredit clients are often self-employed, household-based entrepreneurs.
Their diverse “microenterprises” include small retail shops, street vending, artisanal manufacture,
and service provision. In rural areas, micro entrepreneurs often have small income-generating
activities such as food processing and trade; some but far from all are farmers. Hard data on the
poverty status of clients is limited, but tends to suggest that most microcredit clients fall near the
poverty line, both above and below. Households in the poorest 10% of the population, including the
destitute, are not traditional microcredit clients because they lack stable cash flows to repay loans.
Most clients below the poverty line are in the upper half of the poor. It is clear, however, that some
MFIs can serve clients at the higher end of the bottom half. Women often comprise the majority of
clients.

3.3 How do borrowers use microcredit loans ?

Many microcredit borrowers have microenterprises unsalaried, informal income-generating

activities. However, microloans may not predominantly be used to start or finance
microenterprises. Scattered research suggests that only half or less of loan proceeds are used for
business purposes. The remainder supports a wide range of household cash management needs,
including stabilizing consumption and spreading out large, lumpy cash needs like education fees,
medical expenses, or lifecycle events such as weddings and funerals.
 3.4 How does microcredit help the poor ?

The impact of microcredit has been studied more than the impact of other forms of microfinance.
Microcredit can provide a range of benefits that poor households highly value including long-term
increases in income and consumption. A harsh aspect of poverty is that income is often irregular
and undependable. Access to credit helps the poor to smooth cash flows and avoid periods where
access to food, clothing, shelter, or education is lost. Credit can make it easier to manage shocks
like sickness of a wage earner, theft, or natural disasters. The poor use credit to build ass ets such as
buying land, which gives them future security. Women participants in microcredit programs often
experience important self-empowerment. Empirical studies on the impact of credit are difficult and
expensive to conduct and pose special methodological problems. Most impact studies to date have
found significant benefits from microcredit. However, only a few studies have made serious efforts
to compensate for the methodological challenges. In fact, many studies would not be regarded as
meaningful by most professional econometricians. A new wave of randomized control trials are
now in process, which should yield a more definitive picture. Even so, there is a strong indication
from borrowers that microcredit improves their lives. They faithfully repay their loans even when
the only compelling reason is to ensure continued access to the service in the future.
Chapter - Four

Impacts of
microcredit
4.Impacts of Microcredit

Microcredit has a very important role to play in development according to proponents of

microcredit. UNCDF (2004) states that studies have shown that microcredit plays three key roles in
development. It -
 helps very poor households meet basic needs and protects against risks,
 is associated with improvements in household economic welfare,
 helps to empower women by supporting women’s economic participation and so promotes
gender equity.

4.1 Economic impacts of Microcredit

Income

The 1998 survey found the average annual income of participant households to be higher than that
of the non-participants. Self-employment activities had more than 50% contribution to total income
for the participants as against 43 percent in case of non-participants. Compared to non-participants
the participant households were better able to cope with flood, sustain their income, achieve higher
purchasing power and consumption level.

Food Security
The BIDS study finds the program participants, due to greater access to sharecropping, had better

food security and about 26 percent of rice consumption out of own production.

Wage
Wage earning contributed about 23 percent of total annual income for the land-poor households.
Microcredit helped participant households to earn about 8 percent higher income than that of the
non-participants.
Employment
The participant households are better able to ensure more employment on own farms due to
their better access to the land rental market. Wage and self-employment in non-agricultural
sector is also higher for the participant households due to their access to microcredit program.
 4.2 Social and other development impacts of Microcredit

Sanitation and Drinking water

The BIDS study finds small positive influence of participation on waste disposal and use of
sanitary toilets among the land-poor households with no clear evidence of program impact on
hand- washing. The use of pure drinking water from hand tublewell was found universal

Literacy and school enrollment of children

Adult literacy rate is significantly higher among the eligible participants. The BIDS study also
found that program participation increases the chance of both boys and girls to be enrolled in
schools.

Empowering women

Microcredit programs' main target is women. There are strong evidences that, microcredit programs
contribute to women's empowerment. One consistent finding is the increased self-confidence and
increased self-esteem. Another is women's increased in decision making in the areas of family
planning, children's marriage, buying and selling of properties and sending daughters to school.
Chapter - Five

Present Condition of
Microcredit
5. Present Condition of Microcredit

5.1 Scenario of Micro Enterprise Loan

Institutions Total Numbers of Total Loan Outstanding

Borrowers (Tk Million)

Grameen 9,000,000 703000

Bank
BRAC 7,100,000 19128.64
ASA 4,000,000 9194.57
Proshka 2,100,000 612.12
Others 1600000
 5.2 Comparative Growth of Microcredit (2009-2013)

Growth of Microcredit
500
400
300
200
100
0
2013 (Billion)
2009 (Billion)

2009 (Billion)
2013 (Billion)
 Chapter - Six

Regulation and
Supervision Authority
6. Regulation and Supervision Authority

Bangladesh is considered one of the Birthplaces of microcredit. However, from the emergence of
microcredit in the 70‘s until recently, no NGOs offering microcredit in Bangladesh were regulated
or supervised either by the central bank, the Bangladesh Bank or any regulatory agency, except in
the case of Grameen Bank. NGO-MFIs merely needed to report to the government NGO Affairs
Bureau for certification. This consisted of legal identity, budget approvals, audits and evaluations.
Microcredit activities are run by following regulations:

6.1 The Microcredit Regulatory Authority

The government of Bangladesh has been dealing with the issue of regulating the microcredit sector
since the late 1990‘s. Since then, it has commissioned studies examining regulatory aspects of
MFIs and linking them to the formal financial sector . In 2000 a committee was established which
consisted of members of the Ministry of Finance, the Social Welfare Ministry, NGO Affairs
Bureau, PKSF, Grameen Bank, ADAB, BRAC, and others. It provided the government with
recommendations related to a regulatory framework for microcredit in Bangladesh. The
government passed the Microcredit Regulatory Authority Act 2006 in July 2006 on the basis of the
suggestions given by the Committee. In 2006, the government of Bangladesh established the
Microcredit Regulation Authority (MRA) under the "Microcredit Regulatory Authority Act" with
eight members of its board of directors and with the governor of the Bangladesh Bank as its
chairperson. The Authority is to ensure transparency and accountability of microcredit activities of
the NGO-MFIs in the country and has been given power to issue and cancel licenses for micro
finance operators and oversee, supervise and facilitate the entire range of activities of MFIs. It is
empowered and responsible for implementing the act and bringing the microcredit sector of the
country under a full-fledged regulatory framework.
 6.2 The MRA Act 2006

The basic contents of the MRA Act 2006 are the following :
 No NGO-MFI may act as microcredit institution without the license of the MRA .

 MFIs may not collect deposits from persons other than their members, i.e. they may not
collect deposits from the general public.

 All institutions with microcredit operations must separate their financial operations from
other development works and keep their accounts separate.

 The Authority also has the power to prepare detailed rules related to the operations of
microcredit including conditions for spending any income, area of operations, guideline of
internal and external audit and accounts, collection of deposits, and use of earned profit,
governance structure of MFIs, reporting requirements etc.

 Only MFIs who meet the threshold of either a minimum of 1000 borrowers or minimum
loan outstanding of Tk 4‘000‘000 (approximately $58‘000) may apply for a license by the
MRA .

 The MRA will take punitive measures if any institution does not comply with these rules.
Persons who are convicted are punishable with imprisonment of not more than one year, or
a fine of not more than Tk. 500‘000 .
Chapter - Seven
Conclusion and
Recommendations
7. Conclusion and Recommendations:
7.1 Conclusion

Microcredit has been playing a vital role from the time immemorial to solve not only the economic
problem of Bangladesh for a long time but also the unemployment problem of the country by
employing huge number of people. The above review covers studies conducted on programs of
major organizations in the country over more than two decades applying both quantitative as well
as qualitative methods on impacts of microcredit for the poor and extremely poor. In all cases, the
findings show that microcredit increases employment and income of households that leads to
improved quality of life as indicated by reduced food insecurity, improved housing, health,
sanitation and education and formation of assets in many different forms.

7.2 Recommendations

Though microcredit has flourished successfully in our country, things yet to be done for the
improvement of this industry. For this, the following recommendations can be followed:

 Setting sound macroeconomic policy that provides stability and low inflation .
 Adjusting bank regulation to facilitate deposit taking by solid MFIs, once the country has
experience with sustainable microfinance delivery,
 Creating government wholesale funds to support retail MFIs if funds can be insulated from
politics, and they can hire and protect strong technical management and avoid disbursement
pressure that force fund to support unpromising MFIs.
  Bibliography :
1. www.mra.gov.bd
2. www.wikipedia.org
3. www.microfinancegateway.org
4. www.economist.com
5. Annual Report of Grameen Bamk, BRAC, ASA.

 Acronyms

ASA – Association for Social Advancement.

BIDS- Bangladesh Institute for Development Studies.

BRAC- Bangladesh Rural Action Committee.

BRDB- Bangladesh Rural Development Board.

MFI- Microfinance Institution.

MIX- Microfinance Information Exchange.

MRA- Microcredit Regulatory Authority.

NGO- Non-Government Organization.

NGOAB- NGO Affairs Bureau.

PKSF- Palli Karma Sahayk Foundation.

WWB- Women’s World Banking.

ADAB- Association of Development Agencies of
Bangladesh.
UNCDF- United Nations Capital Development Fund

TMSS- Thengamara Mohila Sobuj Sangha.