ASSIGNMENT NO: 2

Name of the An Assignment on Microfinance in SAARC

Assignment Countries

Course No. AFB-505

Course Title Microfinance Management

SUBMITTED TO SUBMITTED BY

Professor Dr. Jiban Krishna Saha ID No: 2201040104

Professor, Reg. No: 3725
Department of Agricultural Finance Session: 2016-17
and Banking, MS in Agricultural Economics
Sylhet Agricultural University, (Production Economics)
Sylhet-3100. Faculty of Agricultural Economic &
Business Studies

Date of Performance Date of Submission

29 05 2022 23 08 2022
 An Assignment on Microfinance in SAARC Countries

Introduction
Microfinance is a category of financial services targeting individuals and small businesses who
lack access to conventional banking and related services. Microfinance includes microcredit, the
provision of small loans to poor clients; savings and checking accounts; microinsurance; and
payment systems, among other services. Microfinance services are designed to reach excluded
customers, usually poorer population segments, possibly socially marginalized, or geographically
more isolated, and to help them become self-sufficient.
Microfinance initially had a limited definition: the provision of microloans to poor entrepreneurs
and small businesses lacking access to credit. The two main mechanisms for the delivery of
financial services to such clients were: (1) relationship-based banking for individual
entrepreneurs and small businesses; and (2) group-based models, where several entrepreneurs
come together to apply for loans and other services as a group. Over time, microfinance has
emerged as a larger movement whose object is: "a world in which as everyone, especially the
poor and socially marginalized people and households have access to a wide range of affordable,
high quality financial products and services, including not just credit but also savings, insurance,
payment services, and fund transfers.
InM has undertaken a project to publish reports on the State of Microfinance in different regions
of the world each year starting from 2009. For the introductory round of this project, InM
focused on South Asia. Consultants from member states of South Asian Association for Regional
Cooperation (SAARC) have prepared comprehensive country reports on all eight South Asian
countries-Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan, and Sri Lanka. In
these reports they traced and documented the origin, growth, and development of the
microfinance industry in each country. They investigated in detail using important parameters for
both supply and demand sides of the industry the effectiveness of microfinance in poverty
alleviation and delved into the sustainability issue of the microfinance institutions and/or self-
help groups (SHG). Each document contains detailed information and analysis on microfinance
models innovated and practiced in member states, performance of MFIs based on data on
widening and deepening of their programs, impact of microfinance at the household level
measured in terms of income, education, savings, assets, wealth, net worth etc. In addition, there

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is a brief description on financing of MFIs in each report. Sustainability issues are also dealt with
in detail in the reports. Brief review of the regulatory regimes in each country is also
incorporated in the documents. The reports conclude with a chapter devoted to the challenges
facing MFIs and/or SHGs groups in respective courtiers. The objective of the study is to present
the global picture of the microfinance industry in South Asia from both supply and demand
sides. The researchers at InM produced a comprehensive overview report on the State of
Microfinance in South Asia compiling information and analysis of all these individual country
reports. After the completion of the report, it was disseminated through a regional conference on
“Microfinance in SAARC Countries''.

Microfinance in Afghanistan:

In the early years, NGO’s (out of 500 working in 2002) provided credit services. Later, the
Microfinance Investment Support Facility for Afghanistan (MISFA) was established in 2003 as
an apex body, to coordinate donor funds, to help MFIs to scale-up rapidly and to build systems
of transparent and accountable reporting. The delivery methodologies in the Afghanistan
Microcredit market are two:

(1) individual loans and (2) group loans that include (a) village organizations (b) Solidarity
groups (c) self-help groups (d) credit union and (e) seed banks. Most of the MFIs use the group
lending approach and offer credit services in Afghanistan.

The microfinance sector grew at very high rates; the number of active clients and active
borrowers grew at an average rate of 30-35% per annum, between 2005 and 2008. Between the
same time span, loan outstanding per branch, portfolio per staff and cost per active client have
increased, though active borrowers per staff remained almost the same. Trade and service stand
on the top in stated use of funds. Around 70% of the microfinance program beneficiaries are
women in Afghanistan. 40% of clients are in rural areas. More than 80% of the loans were used
for setting up business or expanding them. 47% of urban clients and 39% of rural clients
generate employment opportunities for others. 72% of clients reported an improvement in their
economic situation. 44% of female clients reported absolute control over their money. 80% of
women clients reported 'improved attitude ' of their husband and other relatives, both male and
female.

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The challenges for the microfinance community are to find ways to offer more effective
microfinance services that will gain confidence in the community and change some traditional
societal norms restricting the development process. Challenges for the Microfinance sector in
Afghanistan also include weak management and implementation capacity, Limited source of
Financing, narrow product range, Limited geographical outreach sustainability issues etc.

Microfinance in Bangladesh

In Bangladesh, the dominant microfinance model is the group-best Grameen model with some
operational variations. Small number of individual loans or microenterprises is also available.
Recovery of loans is generally in a weekly and monthly pattern. Recovery groups serve several
purposes:

Low-cost operation, self-selection, information, and credit history collection. However, many
attempts of self-help group approach failed. At present, there are 514 licensed microfinance
institutions (MFIs), but three MFIs mainly dominate the market: BRAC, Grameen Bank and ASA. In
2008, MFIs had 33 million members of which 21 million of them were from three large MFIs.
Membership has doubled between 2003 and 2008. The MFI industry had around 26 million borrowers in
a total of 14,441 branches with USD 2.5 billion loan outstanding.

To summarize the impacts of MFIs in Bangladesh, one can find (1) increased income and
consequently, expenses, (2) increased assets in many forms like savings, land, house livestock
etc. (3) improved social indicators and (4) enhanced management capacity. All of these have an
impact on families. Other impacts include (1) incorporating the poor under the formal financial
system, (2) access to Savings and Finance, (3) information sharing, technology transfer and
access to market, (4) non-financial services are also offered through groups, and finally, (5)
networking.

Nonetheless, there are certain challenges for Bangladesh. One should take into considerations
that, (1) poverty persists and MFIs will be under pressure to contribute more. Additionally, (2)
portfolio quality and financial viability of MFIs, (3) regulatory and political support, (4) demand
for additional services, (5) resource mobilization for MFIs, (6) competition, (7) need for pro-poor
growth policies and support also important challenges.

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So, for a better future, MFIs in Bangladesh must have:

1. To maintain portfolio quality, viability of institutions, and in some cases consolidation of

operations
2. More planned management
3. Ensure resource mobilization
4. Institutional and human resources development
5. Stable regulatory environment
6. Product innovation and research
7. Application of ICT for efficiency and product delivery.

Microfinance in India

At present, approximately 38 million households are reached by microfinance operations. Of

which SBLP (self-help group bank linkage program) has 35.8 million savers and 7.2 million
borrowers, and MFIs have 27 million credit accounts with a portfolio of USD 4.5 billion. Around
3 million had savings accounts under MFIs, which is mostly mandatory. Regional coverage of
microfinance is dominated by the South (about 65%), but is gradually declining; while it is
increasing in the East (around 25%). Growth of SBLP has been left in figure areas in recent
years. In March 2009, SBLP had 86 million savers and 59 million borrowers with loans
outstanding of around US 5 billion. The 27 million borrowers account for regional rural banks by
50%. Which now rivals the banks, assuming overlaps among SBLP/MFI members and multiple
lending. If it is allowed to be seen as an instrument of financial inclusion, the MFI sector would
represent 40% of all micro accounts —SBLP + MFIs would be 57%. CRILEX growth index
shows that MFI growth is stronger than desirable and portfolio growth has been faster than client
acquisition.

Indian MFIs are the most efficient –average OER of 11.1% in 2008 is now just 8.8%, cost per
borrower is less than Rs. 500. Staff productivity has consistently improved. Portfolios handled
per staff were $29,000 while borrower per staff was 234 in 2008. Now 285 and $47000
respectively.

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MFIs also managed to maintain good portfolio quality (around 0. 5% PAR in 2010) after a
drastic fall in 2007. Debt was the dominant source of finance (71%). Productive deployment of
funds has been 77% in loans. Average rate of Road now up to 6.8% with average RoE 25%
indicate high profitability.

Traditionally rural outreach MFIs expanded to urban/city areas in recent years. There is a
moderate coverage of marginal communities around 30%. An estimated 62-63% credit was used
for productive investment, 37-38% used for household needs. Annual client’s dropout rates are
8-10%. Some evidence of poverty Reduction was found for those who stay with microfinance
based on the member recall of SBLP comparison of longitudinal wealth rank data for MFI
clients.

The MF sector faces several challenges:

1. Mission drift of MFIs in a quest for growth and profitability

2. Sector slowdown in 2008 due to global economic crisis - bank became cautious in
lending
3. Lack of deposit services has indirectly contributed to mission drift. If allowed will help in
lowering the cost of credit to clients
4. Social reporting- limited attention by MFIs till recently. In 2010 SPM and reporting
seemed to have gained momentum with the active backing of social investors and
government pressure.
5. Capacity building - growth has not been accompanied by trained field staff/professionals;
high attrition rates are common across sectors.
6. Multiple lending - a high risk factor for the sector what is really required is the
mainstreaming of MF.

Microfinance in Maldives

The Maldives is made up of 1190 islands, which are grouped into 26 natural atolls that together
form a chain 820 km in length and 130km at the widest point set in an area of more than 90,000
square kilometers of the Indian Ocean. Of the 1190 islands 200 islands are inhabited. All are
very small and only 33 inhabited islands have a land area of 1 square kilometer.

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One of the major challenges that are facing Maldives has been to ensure that the benefits of
growth and development are equitably shared between the nations' highly dispersed population.

Since National Development on a planned basis in the Maldives was initiated in 1985, atoll
development has been given a very high priority in the National Development Plan. The first
plan covering the period 1985-1987, and the subsequent documents stressed the need to reduce
the disparity that has been existing between the capital Male' and that of the atolls. In Maldives
the disadvantaged groups of people, namely those living in the atolls, are synonymous with the
poor, although there is no absolute poverty in the country as in the sub-continent. Therefore, any
focus in the Atoll development in the Maldives could be regarded as a poverty alleviation focus
in the national context. In Maldives poverty alleviation primarily means the reduction of regional
disparities in living conditions since poverty problems in the country are primarily related to
remoteness of islands and lack of services due to the mainly sparse population. In addition to
income, the government's definition of poverty therefore includes 11 other factors: access to
electricity, transport, communication, education, health, infrastructure, potable drinking water,
recreation facilities and selected consumer goods, the quality of housing and the natural
environment, and the incidence of food security and malnutrition.

Microfinance in Nepal

Nepal is one of the least developed countries in the world, having US$ 220.00 per capita income.
The Nepalese economy is predominantly an agricultural economy. About 81 percent of the
population is engaged in the agriculture sector whereas about 86 percent of the population lives
in the rural sector of the country. Agricultural sector contributes 40 percent to the Gross
Domestic Product (GDP) of the country. According to the National Living Standard Survey
1996, about 42 percent of the population were found to be living below the poverty line but at
the end of the Ninth Plan 2001, the figure had come down to 38 percent.

Nepal Rastra Bank Act, 2002 has empowered the NRB to inspect and supervise all financial
institutions including Rural Micro-Financial Institutions and issue directives. So, NRB has
played a key role in policy formation and execution to the financial institutions. The major
policies issued for the Micro-Financial institutions are as follows:

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 1. Commercial banks are required to extend 12 percent of their outstanding loans and
advances as priority sector credit, of which 0.25 to 3.00 percent should be extended to the
deprived sector.
2. The central bank provides refinance facilities to commercial banks against the credit
documents of the priority sector.
3. In order to open an urban branch, commercial banks need to open one branch in a semi-
urban area and one in a rural area.
4. Micro credit is normally based on group guarantees and it is collateralized lending.
5. The Financial Intermediary Act, 1998 has been enacted to enhance the Financial
Intermediaries (FINGOs) for wholesale lending.
6. "Poverty Alleviation Fund " has been created for the growth of rural financial markets.
The fund will be utilized for conducting training programs and extending micro-financing
services.
7. Rural Microfinance Development Center (RMDC) Ltd. has been established for
wholesale lending to Micro Financial Institutions to enhance rural micro-credit.
8. Single borrower limit of micro credit (deprived sector) has been fixed up to Rs.30, 000.
9. Commercial banks can also provide credit to the ADB/N, RDBs, SACCOs, and FINGOs
as priority sector credit.
10. Nepal Rastra Bank is carrying out the " Restructuring Programme "in Grameen Bikes
Banks due to the heavy losses.
11. The Priority Sector Credit Programme extended by the commercial banks will be phased
out within the next five years but deprived sector lending will remain valid.

Microfinance in Pakistan

Pakistan entered the microfinance sector relatively late to other South Asian countries. Although
microfinance started during the 1980s in Pakistan, it saw the entry of some major players in the
sector in the 1990s. By the mid-1990s microfinance attracted tremendous interest from the donor
community as a tool for poverty alleviation with a unique promise of financial sustainability,
hence a “double bottom line” was experienced. However, microfinance took its momentum in
2000 when the government formally entered microfinance as a regulated financial institution
established under the new Microfinance Ordinance of the State Bank of Pakistan. The

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microfinance movement in Pakistan followed a unique revolutionary path over the last decades.
Pakistan Poverty Alleviation Fund is the apex body of microfinance in Pakistan. The year 2000
was the major year when numbers of microfinance evolved in the financial services. As of now,
there are 8 microfinance banks, 4 Rural Support Programs, 8 Specialized microfinance
institutions, 8 NGOs, 2 commercial players serving the microfinance market. The average annual
growth rate of microfinance credit outreach during 2005-08 witnessed a modest 45 percent. The
recent slowdown in the growth momentum is due to funding constraints and overall
microeconomic environment.

Microfinance outreach in Pakistan increased from 68,561 in December 1999 to 1,975,820 clients
in June 2010. Average growth rate was over 45% during 2005-08. Recent slowdown in growth
momentum is experienced due to funding constraints and overall inconvenient macroeconomic
environment. From Rs. 0.06 billion (December 2001), deposits have been increased to Rs. 8.33
billion (September 2010). However, portfolio at risk (PAR) remained between the international
benchmark of 5% and South Asian benchmark of 2%, reaching 4.77% (September 2007) at the
top and failing up to 2.25% (September 2008) at the lowest. This reflects the credit-worthiness of
Pakistani the credit-worthiness of Pakistani borrowers and their repayment capacity.

Microfinance in Sri Lanka:

There are several models of MFIs in Sri Lanka. Such as; Individual lending using a group
(center, Cluster) as a focal point, village banking, Self-help groups and Individual lending. Loan
guarantees are provided using two members' guarantee methods, Grameen type group collateral,
etc. However, recent trends involve less paperwork, quick lending, and recoveries in a structured
manner.

MFIs in Sri Lanka can be broadly categorized into two parts:

1. Microfinance as core business

2. As an ancillary business.

The first one covers MFIs (National /Regional /local and NGOs/ private), Government MFIs
(Samurdhi/Agrarian services), village banks, co-operative establishment, and specialized

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Development Banks; where the latter one covers Regulated Development Banks, commercial
banks, and Finance/ leasing companies.

In 2008, National/ Regional/ Local MFIs had the highest USD96 of average savings per member.
However, CRB (deposit account) had the highest savings of 31,998 million SLR in 2007.

RDB had Rs. 32 billion in savings, 50% of this estimated to be micro savings. In case of
borrowers and loans outstanding in 2008, National /Regional /Local MFIs topped at USD164
average loan outstanding per borrower. Loan outstanding of CRB in 2207 was SLR21,711
million. Over 65% of members were females. Approximately 30% of the total population and
50% of the population below the poverty line were reached. Nonetheless, some critical issues are
multiple borrowing, lack of accurate data, significant number of members in CRB and some
members of VB and MFIs (less) are not poor, reach in North and the East are weak and reliable
data is not available.

Microfinance in Bhutan

Bhutan is the only country in South Asia where formal microfinance is provided solely by the
government. The Bhutan Development Finance Corporation is mandated to provide credit to
small and medium scale industrial and agricultural activities- particularly in rural areas. Lending
activities are dominated by industrial loans. BDFC issued a specialized banking license in
March, 2010 (Deposit taking & lending)

Microfinance in Bhutan is necessary because there are

1. Huge mismatch in demand and supply for financial services.

2. Need for increased access to diverse range of financial services to the underprivileged.
3. Promotion and mainstreaming of the informal sub-sector into the national financial
system.
4. Majority of poor are excluded from the financial services mainly due to collateral based
lending and huge transaction costs.

Possible measures for promoting Microfinance in Bhutan are: Financial literacy, Priority sector
lending, Institutional Subsides from the RGOB to develop the MFIs sector, Encouraging

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Branchless Banking (mobile banking), Encouraging Group Lending Model, Providing simplified
products etc. Challenges for the microfinance sector are mainly: Accessibility, Formulation of
appropriate and efficient delivery model, institutionalizing strong collaboration among Banks,
Specialized Institutions and MFIs, Changing the mindset of the financial sector, and moving
away from collateral-based lending to cash flow or project viability.

General Effects of MFIs in SAARC Countries

One could make a distinction between ‘impact’ and ‘effect’. By impact, we define the changes in
the personal and household level leading to changes in quality of life mainly due to the change in
income from investment in income generating activities. By effect, we mean many different
services and benefits that have emerged with the proliferation of microfinance. Therefore, the
effects are no less important than the direct impact of services on quality of life. For Bangladesh,
the following can be considered as direct broader effects of massive proliferation in the
microfinance sector:

❖ Access to market information has improved in the sense that the interactions of members
within the groups provides opportunities for informally receiving market information
such as price of various inputs, commodities, and production levels. Hence, social and
marketing networks are more established.
❖ These MFIs created access to essential training services for the poor. Many government
and donor agencies and NGOs provided millions of man-days of training on numerous
topics mostly for free. These topics included awareness building on social issues, poultry
and livestock rearing, fisheries, health and family planning, vegetable and crop
production, tailoring, business management, accounting, etc.
❖ With the huge growth of MFIs in Bangladesh, access to technological information and
demonstration of production technologies have benefited the participants of microfinance
programs. To conclude, available evidence from SAARC countries show that
microfinance programs have had positive impacts on the economic status of households
—increasing money assets and saving of households, smoothing consumptions, and
improving diets of households, reducing households’ dependency on moneylenders, and
finally reducing overall incidences of poverty and extreme poverty.

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 ❖ Similarly, microfinance programs have had a positive impact on the social status of
households’ particularly in increasing the decision-making role of women, increasing
participation of women in own or household enterprises and increasing spending on
health care. Also, enterprises supported by microcredit have clearly gained in productive
assets, increased employment, and made more profits.

Beside the above specific impacts, there are some significant general effects of microfinance—
creating access to market information for clients, providing training to members and creating
access to new technologies for members.

Emerging Challenges for Future of MFIs in SAARC Countries

Microfinance is now globally recognized as an effective tool for the reduction of poverty. It has
shown positive results in many countries. However, microfinance services have not yet deepened
to reach the neediest poor. There are still huge masses of people who are deprived of financial
services in several developing countries. At the same time, there are several challenges facing the
microfinance industry. The review of experiences and lessons from country reports throw up
some key challenges for microfinance programs in the future.

❖ Sustainability of MFIs
❖ Appropriate Microfinance Regulation
❖ Institutional and HR Development

Directions for Future of MFIs in SAARC Countries

The reviews of experiences of 8 SAARC countries clearly show that microfinance programs in
these countries have come a long way. Bangladesh has made the most impressive progress. The
Grameen Bank started in Bangladesh with a mono-lending product (i.e., general loans) with
required savings in small amounts. Over time, Grameen Bank has developed more flexible
products, such as open passbook savings and commitment savings accounts, to better meet the
various financial-services needs of the poor. The Grameen Bank’s original vision was access to
simple loans that can help the poor build small businesses. But introducing more flexible
financial products has helped address a broader set of critical needs, including managing cash

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flows, coping with risks, and accumulating large sums over time. Sri Lanka and India have also
done well, going somewhat in different routes. Other countries are in different stages of progress
and the reviews clearly establish that microfinance even in the country where it has progressed
most— in Bangladesh, there are still rooms for further progress and in other countries
microfinance can, of course, do much better and advance forward.

❖ Ensuring Sustainability of MFIs

❖ Scaling up Microfinance and Catering to Needs of Poor More Comprehensively
❖ Extending Beneficiary Targets and Development of New Products and Services
❖ Linking with the Formal Financial System
❖ Improving Regulatory Frameworks
❖ Increasing Use of New Technologies
❖ Creating a Favorable Political and Social Environment for Expansion of Microfinance.

Conclusion
Microfinance programs in SAARC countries have come a long way. Bangladesh has met the
most impressive progress, starting from a mono -lending product which requires savings in small
amounts. over time, more flexible products emerge to better meet the various financial service
needs of the poor. The milestone in the way forward for South Asian Microfinance sector are:
ensuring sustainability of MFIs, scaling up microfinance and catering to need a poor more
comprehensively, extending beneficiary target and development of new products and services,
linking with formal financial system, improving regulatory framework, increasing use of new
technologies, creating favorable political and social environment for expansion of microfinance.
South Asia experience implies that the dependence on subsidized funding will have to end some
day and it would be vital to worry about sustainability of the MFIs in future. Most MFIs in South
Asia are still dependent on the external source of fund subsidy from foreign donors (Afghanistan,
Pakistan, and Bangladesh) and from Governments (Sri Lanka, India, and Bhutan). The MFIs
must try to generate their own funds and build up their equity if they want to remain in the
industry and become financially viable.
So far microfinance has provided most of the access to finance service available to low-income
people in South Asia, but is it still largely separated from the overall financial system. The
microfinance movements of the past few decades have fundamentally changed the financial

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sector and the change process is gathering momentum. Now there are opportunities to take the
microfinance movement to the next stage of its development- a stage in which a more inclusive
financial sector can be shaped to better serve the needs and the interest of the poor. This process
is beginning to happen in Bangladesh and such opportunities should expand in other countries as
well.

Central Bank and finance professionals including researchers will need to take the lead to urge
politicians and media to help change the conservative economic environment relative to the poor.
Countries where microfinance is developing actively, governments should provide at least some
of the ground rules that favor financial sector development and microfinance. Most of the
countries that have liberalized their financial system during the past decades have established
these conditions, or are well on their way to do so.

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References:

https://en.wikipedia.org/wiki/Microfinance

http://inm.org.bd/state-of-microfinance-reports/

https://www.bb.org.bd/saarcfinance/seminar/cpbdesh.php

https://www.bb.org.bd/saarcfinance/seminar/cpmaldive.php

https://www.bb.org.bd/saarcfinance/seminar/cppakistan.php

https://www.bb.org.bd/saarcfinance/seminar/cpsrilanka.php

https://www.bb.org.bd/saarcfinance/seminar/cpbhutan.php

https://www.bb.org.bd/saarcfinance/seminar/cpnepal.php

https://mpra.ub.uni-muenchen.de › ...PDF

Microfinance in SAARC Countries: Updates 2011

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