CGAP Study: Slowing Growth Key to Avoiding a Microcredit Crisis in Bangladesh
WASHINGTON, July 30, 2013 /PRNewswire-USNewswire/ -- A new report released today by CGAP, Averting a Microcredit Crisis in Bangladesh, indicates that during the period 2008 to 2010, Bangladesh microfinance institutions (MFIs) successfully averted a microcredit crisis. The report finds that MFIs took the necessary steps of slowing growth and placing renewed focus on repairing finances, improving internal controls, fixing staffing challenges and re-establishing credit discipline to avoid the crisis.
Giving an overview of the microcredit market in Bangladesh from 2004 to 2007, the report shows that the microfinance industry added 15% to 28% active borrowers annually during that time period. But starting in 2008, total borrower numbers plateaued: the country's four major MFIs stopped adding branches and staff and the number of active borrowers stopped increasing. The report points out that the MFIs pulled back in reaction to two main problems: first, they began to sense the negative consequences of market saturation; second, they became more aware of internal management problems.
"There are four MFIs which make up over two-thirds of the microfinance supply in Bangladesh, each founded in the wake of Bangladesh's independence and with strong commitments to national development," notes Greg Chen, CGAP's Regional Representative for South Asia and co-author of the report. "Beginning around 2008, each began to take independent steps to slow growth. 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." 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.
The report analyzes a decade's worth of financial and performance audits as well as other numbers provided by the four largest MFIs. To bring a client-level perspective to the data, the report authors conducted random interviews with 43 low-income rural Bangladeshi households in 2013. These interviews illustrate the financial portfolios of the people interviewed, including their use of formal, semi-formal and informal tools.
"Some of the people we interviewed had three decades of exposure to microcredit," said Stuart Rutherford, co-author of the paper. "Bangladeshi clients tend to be very experienced with the services of MFIs, which helps them weigh the stress of borrowing with the potential benefits. The interviews helped us understand how microfinance fit into the overall lives of these clients and whether or how that has changed over time."
Based on the interviews, the authors observed that cases of the most serious kind of over-indebtedness, where there is a permanent drop in household welfare, are not common now, nor were they during the high growth period. While the small sample of household interviews limits more general conclusions, the interviews did reveal a level of debt stress among some clients that the microfinance industry needs to take seriously.
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