MAKING MICROCREDIT SYSTEM EFFECTIVE IN BANGLADESH

Microcredit has helped address poverty by providing loan in small amounts without collateral and has helped in particular women who are the target borrowers of micro lending. Over the years, various challenges withregard to microcredit have emerged. These are: (i) prevalence of high interest rates which are being reduced, but further reduction of interest rate is necessary; (ii) vicious cycle ofmicrocredit - the poor are borrowing from one microcredit organization to repay another; (iii)microcredit programmes have not been very successful in including the hardcore poor; (iv)rate of graduation to above the poverty line among the microcredit borrowers is low, indicating persistent dependency on microcredit; (v) most of the microcredit recipients being women, bear the burden of repayment; (vi) microcredit organizations compete with each other and often put pressure on the potential clients to borrow; (vii) profitability of micro enterprises is small and often is not sustainable on a long-term basis because of enterprise decapitalization, saturation of markets for products that are traditionally produced by microcredit borrowers, weak coordination among NGOs and MFIs (Micro Finance Institutes) and a weak financial system. Efforts will be made to upscale the technology base in utilizing micro credits and bring transparency in interest rate fixation and in offering micro credits. 

Currently the emphasis is to increase the coverage of the programme to a larger number of deserving households; introduce a uniform approach of operation both by NGOs and the public sector; and introduce a regulatory framework for streamlining the activities of the microcredit programme in the country. The government would channel more resources for microcredit operations, increase effectiveness ofmicrocredit for poverty alleviation, avoid overlapping and reduce seasonal vulnerability through microcredit. Local governments will be involved in microcredit delivery. 

A Microfinance Regulatory Authority (MRA) has been established to provide appropriate regulatory framework. A national microcredit policy will be framed to provide guidelines about the operation of microcredit. It is also necessary to rationalize interest rates. Necessary mechanism will be devised to ensure that microcredit reaches the ultra poor and the hard to reach areas especially those located in regions with higher incidence of poverty.

Up-scaling Microcredit 

Up-scaling microcredit is a natural consequence of microcredit programme as the progressive microcredit recipients demonstrate their entrepreneurial ability to handle larger size loans requiring expansion, deepening and diversification of loan products. Some of the microcredit organizations, notably some partner organizations with support of PKSF (Palli Karma Sahayak Foundation) have increased their loan ceilings to Tk. 300,000for microenterprise programme and to Tk. 30,000 for all other programmes. The microenterprise loan not only helps reduce poverty of 

the borrowing household but also creates employment opportunity for other poor people. It is expected that as more and more borrowers graduate out of the regular microcredit programme the demand for larger size loans will increase.