Two Cautionary Tales from Bangladesh

In a well-argued recent posting in this series, Shameran Abed of BRAC warns us against attributing all of microcredit’s ills to commercialization. He reminds us that in Bangladesh there is evidence of an over-supply of microloans, with unhappy outcomes for some borrowers, even though private capital in pursuit of profit has played only a small part in the financing of microcredit. Fiercely competitive fast-growing MFIs registered as non-profits but flush with retained earnings, client deposits, and soft loans from a World Bank-backed wholesaler, have recruited borrowers with little regard to the household’s existing commitments, and ratcheted up loan values to the point where many clients find it difficult to meet the strictly-imposed weekly repayment schedules of their multiple lenders.

I am a long-term observer of Bangladeshi microfinance, and again this month I have been wandering the villages and urban slums of Bangladesh talking to microfinance clients, ex-clients and non-clients, and to MFI staff at all levels. In this blog I would like to complement Shameran’s posting by telling two unhappy stories of the sort that are not hard to find in the field, and showing how they arise. I argue that under current conditions in Bangladesh, finding ways to avoid these outcomes should not be difficult for MFI leadership.

To start us off, here are two observations about the social reality of Bangladeshi microfinance. The first is that most loan officers are educated and male, while most of their clients are unschooled or poorly-schooled, female, and biddable. The second is that loan officers, worried about their own job security, respond strongly to incentives knowingly or carelessly given them by their HQ leaders: above all, incentives to maximise client-load, portfolio value, and on-time repayment performance.

To see what this combination can lead to, look first at Rokeya’s case: Rokeya joined a major MFI about six years ago, and saved and borrowed successfully until her husband died in 2009. Since then she and her son, who drives a hired rickshaw, have struggled to look after the family, which includes two school-going girls. Microfinance helps: Rokeya has passbook savings and a long-term commitment savings account at her MFI, and she values both. The first helps her smooth consumption, the second gives her the security of a growing lump sum that she hopes to spend on her daughters’ marriages but is also there for the taking if an emergency occurs. Her excellent record and her deposits put her in good stead at her MFI, so she knows that, in case of need, she can also borrow.

So far so good, but this picture has a major flaw. Her loan officer, incentivised by disbursement targets, wants Rokeya to borrow continuously, in ever greater amounts. Recently, despite her pleading that she really had no use for it, he persuaded her to borrow 20,000 taka (about $285), hinting that unless she did so ‘his manager might not let her keep her account.’ Rokeya asked me the inevitable rhetorical question, “sir, what would I do with 20,000 taka?,” so I threw it back at her: “well, what did you do?” She on-lent it to a neighbour. So far the neighbour has met the weekly payments, but we are still in the early days of the 48-week term. I didn’t need to ask Rokeya what would happen if the neighbour failed her: the question was already there in our eyes. “Only Allah knows,” she said.

If Allah is not kind to Rokeya, and her neighbour does fail her, Rokeya could lose the most reliable financial tools in her portfolio. Like many other MFI ex-clients she would probably have to trade in her savings to repay the overdue loan, and close her account. Her case illustrates the downside of Bangladeshi microcredit’s remaining so supply-driven. Yet a much healthier demand-driven model should not be difficult for the country’s MFIs to engineer: they need only modify their instructions to branch staff and devise incentives that encourage them to wait for clients to ask for loans rather than force loans on them.

There is another outcome that might have awaited Rokeya if her neighbour failed her. It happened to Shamsunnahar, who lives in a Dhaka slum with her parents, and has a job – of sorts – in a garments factory.

Shamsunnahar bet that her garments job would supply her with enough income to service MFI loans that could make her elderly parents’ life more comfortable, with stocks of rice, better roofing on their hut, a TV, and the like. She signed up with an MFI, took a loan, and paid it down without trouble. She took a second, bigger loan, and then a third. A few weeks later her employer lost a big export customer and put the factory staff on part-pay, repeatedly promising that all would be put right in due course. It wasn’t, and Shamsunnahar went overdue on her MFI loan. She explained the situation to her loan officer, who was sympathetic.

The sensible course would have been to reschedule the loan: Shamsunnahar’s previously good payment record, her growing savings balance, and her frank account of her difficulties all justified a rescheduling. But the loan officer responded to incentives that castigated repayment failure and his MFI had little experience with rescheduling, so he simply insisted on her finding the weekly payments ‘by hook or by crook’. For some time Shamsunnahar managed to pay from her reduced income along with casual loans from neighbours. But in the end she had little option but to look for larger-scale, more reliable credit. The place to get that, of course, is at a second MFI, which is the course she was obliged to follow. By pretending she was about to set up a business, she was able to persuade her new MFI to give her a loan with a two-year term.

Shamsunnahar hoped to pay off the first MFI with the loan from the second, retrieve her savings from the first MFI, and then pay down the second MFI loan at a more leisurely pace over two years. But she fell victim to a second kind of inflexibility within the MFI system: the first MFI did not permit pre-payments of large sums, and insisted that she continue with weekly payments to the end of the term, and only after that would she be able to claim her savings. Worried about these commitments, Shamsunnahar stored the whole of the second loan at home, and used it to pay both MFIs on a weekly basis, a process that put a great deal of stress on her frail mother, whose job it was to take the money along to the weekly meetings while Shamsunnahar was at the factory. It proved unsustainable: there were just too many calls on the cash stored at home. With the inevitability of a medieval morality drama, within a few months Shamsunnahar was again overdue, this time with two MFIs. She remains today with high levels of anxiety, considerable debt and little real prospect of paying it off.

What will happen to Shamsunnahar? Happily for her, she lives in a Bangladeshi slum and deals with Bangladeshi MFIs, by world standards a relatively safe environment for a small-scale debtor. No-one will send in the bully-boys or set the dogs on to her, but the loan officers, somewhat shamefacedly, will pester her and her mother from time to time over many months. Once or twice the branch or regional manager will come and add the weight of their presence, whereupon Shamsunnahar’s deeply embarrassed mother will borrow a few taka from her neighbours to make a ‘token’ repayment and offer solemn promises to repay as soon as possible. In the end Shamsunnahar’s savings will be confiscated and the remaining loan balances written off, after which she will be subjected to occasional ‘bad debt collection’ campaigns run by groups of staff on their day-off. After some more months have gone by, she’ll be forgotten. She may even join another MFI and start over. The outcome will be as unsatisfactory for the MFIs as for her – and all of it needless.

Up to three or four years ago Bangladesh’s MFIs were ‘racing to the precipice,’ determined to gain an edge on their competitors, recruiting clients and expanding their portfolios heedlessly. MFI leaders saw the presence of several other MFI branches in a village or slum as a signal that they too should gain a foothold there, rather than as a sign that supply there was already ample. Under those conditions it would have been naïve to argue that MFIs should pull-back on staff incentives that pushed client numbers and portfolio value to their limits.

Now, though, all that has changed. At least two of the three biggest MFIs so clearly see the need to rationalise supply that they are trying to collaborate by sharing out territory, closing or merging branches, and reducing their client numbers. ASA, in particular, has seen a rapid and dramatic fall in the number of borrowers it serves. Experiments with loan rescheduling are going on – Grameen is the leader in this – and more MFIs are beginning to see that repayment schedules should be flexible enough to accommodate pre-payments. Big MFIs are trying, with some success, to increase the share of their loan portfolios held by larger-scale enterprise lending to individuals, at the expense of the traditional group-based smaller general-purpose loans of the sort that Rokeya and Shamsunnahar took. BRAC is probably ahead of the pack in this respect.

The MFIs now have a strong interest in cutting back wasteful and counter-productive habits like the continuous lending imposed on Rokeya and the failure to reschedule Shamsunnahar’s loan. There is no doubt that they can do it. For leaders who devised Bangladeshi’s microfinance miracle in the first place, adjusting staff instructions and realigning incentives to remove these foolish practices should be a piece of cake.

Let them eat it soon!


06 September 2012 Submitted by Peter van Dijk (not verified)

Dear Stuart, dear Madam/Sir,

Although mentioned by the author, it is clear that the problems of over-indebtedness of the poor and the sustainability of Microfinance in Bangladesh can only be resolved when two challenges are faced:-
1. The politicisation of MF and
2. The unregulated support by foreign donors, including the development finance institutions (DFI, including the World Bank Group, FMO, Triodos, KfW, CitiBank, Blue Orchard, etcetc.).

CGAP could have role in helping local regulators with these challenges.

If you agree with my statement, I would welcome your response in explaining how CGAP will undertake to support local regulators.

Kind regards, Peter

Petrus van Dijk
BSD City, Indonesia

06 September 2012 Submitted by Dr V.Rengarajan (not verified)

Dear Stuart Rutherford
It is irony to note that in the country which demonstrated the world that micro credit can become a panacea for poverty alleviation (thanks to Yunus) is very much marred by the unethical attitude of a few selfish oriented field staff of MFI in a manner micro credit causing aggravation of poverty. The two case studies (Rokeya & Shamsunnahar) have amply demonstrated the social realities in Bangladesh Micro financing pointing out following facts
1 Among the micro finance services, the role of saving assumes importance as it ensures a kind of protected living environment and it appears Rokeya is leading comfortable livelihood with the accumulated savings on hand without much depending on micro credit and has an option only to borrow in case of need.. But the factors such as compulsion to borrow by threatening officer and inevitability of relending to neighbor involving risk with no other option in the first case and no facility for either for rescheduling repayment forcing to go to another MFI or prepayment in second case have thoroughly demoralized them and derailed the poor women in their trajectory for poverty alleviation.
2.Although the loan officers are responsible for this affairs, the institutions who engage them also are accountable . But in the context of prevailing unethical competition, easy access to loan able funds from different sources, saturated market , quick profit, the social cause (client’s welfare)and ethical practices have been forced to take a back seat in Microfinance arena. There is subtle difference between the above situation (case study)reflecting the coercive practices for recovery in Bangladesh and AP in the money lending activities using the brand name of Microfinance.
3. If the incentive system only (among others)leads to all the above sordid situation at poor client’s household level in Bangladesh MF arena , I agree thT there is a need for realigning incentives to remove these foolish practices as emphatically pointed out . In this regard for realigning exercise different purposes as suggested below may be considered for such incentives.
1. More coverage of the fresh eligible borrowers
2. Sale of diversified MF products such as micro insurance ( MFI need to diversify MF products without confining to micro credit only )
3. No of poor clients crossing poverty line (prescribed line) in their respective staff service area and become independent living with debt stress
4. Growth of normal business without happening of the above incidence as stated or similar kind forcing the clients much against their wishes case studies.
5. Avoidance of multiple finance in their respective service area
6. Entrusted with discretionary power for considering moratorium or rescheduling for a shorter period in genuine case
(suitable incentives for 5 & 6 depending on performance)

06 September 2012 Submitted by Timothy Lyman (not verified)

Dear Peter,
As a modestly sized global organization CGAP does not have a permanent presence in most countries, and of course many policy issues are country-level or even local-level in nature. We do find that CGAP’s global reputation is quite powerful, and we work with local and regional organizations to bring that reputation to bear where we feel we can have substantial impact to advance financial inclusion.

At a global level, CGAP is quite active, and we believe, also influential with respect to financial inclusion policy. By partnering with decision makers at a national level, and also with global standard-setting bodies, we find that CGAP can influence the global discussion, and decision-making. For example, our support to the G20 as a technical advisor to the Financial Inclusion Experts Group, in partnership with the Alliance for Financial Inclusion, led to the adoption of some quite forward-looking “G20 Principles on Innovative Financial Inclusion,” aimed at advancing the cause of financial services for the poor in G20 countries and non-G20 countries alike. This work led to the launch of the Global Partnership for Financial Inclusion in Seoul in November 2010. Together with the Central Bank of Argentina, CGAP co-chaired the Basel Committee’s microfinance workstream led to the Committee’s first guidance on the regulation and supervision of depository microfinance. We are also active with the International Association of Insurance Supervisors and most recently also the International Association of Deposit Insurers.

But when microfinance becomes politicized at the country or local level, it is difficult for an organization like CGAP working at a global level to influence policy decision making directly. In such circumstances it is often organizations with an “on the ground” presence that are best placed to influence events, avert negative change and foment positive change. We believe our greatest contribution is to provide the global research, guidance and data to support local partners in making the case for a broader vision of financial inclusion and what that can do for poor families in developing countries.

Timothy R. Lyman
Senior Policy Advisor/CGAP

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