Many of us borrow from different sources. However, the risk is over-indebtedness and this is something that we have seen in the formal financial sector. In order to address this in the formal sector the Bangladesh Bank (BB) set up the Credit Information Bureau (CIB). There is an urgent need of developing a micro-finance Credit Information Bureau. There has been a lot of talk about this for the last ten years but hardly any concrete action has been taken. The industry should get together to make this happen as it is even more urgent than before. The reason is that the size of the industry has grown so much that it is important to know credit histories and multiple borrowing issues before new loans are made.
Moreover, with the advent of mobile phone banking a microfinance CIB can truly revolutionise the industry like in other countries as loan officers can receive information about existing and potential clients on their mobile phones. In Bolivia, for example, if the client of one microfinance institution (MFI) goes and applies for another loan from a different MFI, the CIB immediately sends that message to the mobile phone of the original loan officer. Of course, the CIB is not a magic bullet and won't solve all problems. In addition to this in the formal sector we have now developed the large loan monitoring software so that we can identify those individuals or groups who can potentially cause systemic problems if they are allowed to borrow excessively by individual banks. But these happen in a certain logical sequence and as such the Microcredit Regulatory Authority (MRA) and the industry in general should move quickly on the CIB front.
Bangladesh has achieved scale in microcredit in an unprecedented manner and one of the reasons it has managed to do so relates to the relatively light-touch regulations that the industry faces. The central bank is striving to maintain the right balance of ensuring that microfinance institutions have the space to innovate while maintaining oversight of poor people's money. So the MRA has been set up to achieve this balance and its capacity will be strengthened to achieve these goals. However, the MRA needs to focus on regulating the large and medium MFIs first as problems with these MFIs could impact the whole system.
A third issue is that in Bangladesh, as in many low income countries, there are serious gaps in understanding basic financial concepts and applying basic numeracy skills, such as the ability to calculate rates of return on investments, the interest rate on debt, and basic arithmetic ability; an understanding of the benefits and risks associated with particular financial decisions, including spending, borrowing and investing. Due to lack of appropriate basic knowledge, people have difficulty in learning about new innovative products and services of banks and MFIs.
Bangladesh Bank has a financial literacy programme using radio, TV and internet to address some of these knowledge gaps. The MFIs should consider how they can make it easier for their clients to understand exactly what products are being offered, what the interest rates are and what the advantage and disadvantages of the different financial products you are offering are. This could also reduce the drop-out problem addressed in the paper.
It is clear from the research evidence that microfinance can protect households from shocks, contribute to changing societal norms about the role of women in society and lead to some households moving out of poverty. Overall, it has played its part in the impressive progress Bangladesh has made in poverty reduction over the past two decades.
Moreover, recently MFIs are developing linkage programmes with banks to provide agricultural credit, particularly on behalf of those banks which have insufficient outreach in rural areas. The MFIs have also been participating in joint platforms with banks in delivering remittances at faster speed. All these have helped foster financial inclusion. At the same time, we need to be mindful that not everyone utilises loans productively and there is a risk of falling into over-indebtedness. So, the role of microfinance should be strengthened through further innovations which take into account these pitfalls. The potential of microfinance can be best exploited by recognising the lessons from studies, strengthening programmes on the basis of research and field experience, and by incorporating microfinance programmes into Bangladesh's overall poverty-reduction strategy. It is through carefully designed empirical work that the perception gaps on micro-finance will slowly be bridged and the debates will become less polarised in their opinions.
Finally, how does microfinance continue to evolve, innovate and keep pace with the modern world, without losing the important roots of why it started and how? One answer is that it begins and ends with the borrower. If borrowers continue to do well microfinance overall will prosper and there will be general public support for it. And for borrowers to do well, microfinance institutions will need to modernise and in the process there could be painful transitions. At the same time, while change is both natural and inevitable given the way technology is altering our lives, we also need to retain the history and traditions of these great microfinance institutions which have made Bangladesh a better place to live and have made us very proud overseas.
The article is adapted from the speech Dr Atiur Rahman, Governor of Bangladesh Bank, gave at the national conference on microfinance, organised by the Institute of Microfinance, Dhaka on August 25, 2013.
