A Microcredit Crisis Averted: The Case of Bangladesh

30 July 2013
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Excessive lending into a saturated market could cause a ‘train crash’ that might cause great sector-wide damage and burden borrowers with debts they did not need.

Bangladesh’s microfinance industry, which grew large in the 1990s, continued to expand well into the new century, adding 15–28 percent active borrowers annually from 2004 to 2007. Then in late 2007 microfinance institutions (MFIs) began to worry that continued rapid growth could have negative consequences. In 2007, Shafiqual Haque Choudhury, the founder and president of ASA, one of the largest MFIs, remarked, “Excessive lending into a saturated market could cause a ‘train crash’ that might cause great sector-wide damage and burden borrowers with debts they did not need.”

Bangladesh’s microfinance was on the verge of a sharp change in direction. The country’s big four MFIs—ASA, BRAC, Buro, and Grameen Bank, which constituted two-thirds of microfinance supply for the past decade—in aggregate stopped adding branches and staff around 2008. The change in course happened without notice or wider public discussion, and before microfinance crises in other countries, such as Nicaragua, Morocco, and India, came to light.

Soon, the aggregate number of borrowers also stopped growing. The active borrower totals contracted modestly as the sector pulled back, closed some ancillary loan products, and completed other house cleaning. The number of borrowers has plateaued ever since.

The slight contraction of branches and staff and the leveling off of customer numbers in turn affected the loan portfolios. Figure 3 shows their combined portfolio, and distinguishes the microcredit loans—to members of village groups—from small enterprise loans (SEL) to individual businesses. Interestingly, SEL rose from 10 percent of portfolio in 2003 to 30 percent by 2012, with the biggest shift happening during 2007–2008 just as microcredit lending slowed. Microcredit portfolios grew again in 2011–2012 as a result of a sharp increase in loan sizes, a step-change that is expected to level off, with loan sizes in the future stabilizing in line with inflation.

The story behind the numbers Why was growth so fast up to 2008? Why did the expansion of branches and staff suddenly stop in 2008? Why did the number of borrowers level off? How has the market adjusted? Was a crisis brewing but then averted? This Focus Note explores these questions. To see the full picture, we will describe not just how the MFIs behaved, but also compare the accounts given by MFI leaders with the views of their clients. Our aim is to describe the evolution of microfinance in Bangladesh over the past decade and to draw lessons from the sharp change in direction that began in 2008 as Bangladesh averted a crisis.

 

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. Summaries of all 43 interviews are available online. You can join the authors for a live Q&A session on 6 August, 2013.

 

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