VOL 23 NO 306 REGD NO DA 1589 | Dhaka, Saturday, September 24 2016

http://print.thefinancialexpressbd.com/2016/09/24/152349

Microcredit:Increasingdemandforreducinginterestrates
M S Siddiqui

Micro-credit programme of Bangladesh is well known throughout the world. It is being

implemented by microfinance institutions (MFIs), state-owned commercial banks, private
commercial banks, and specialisedprogrammes of some ministries of Bangladesh government.
The programmes are financed through savings collected from clients, cumulative surplus (profit),
concessional loan received from sources such as the Palli Karma-Sahayak Foundation (PKSF),
grants received from national and international donors and commercial bank borrowing.
In some countries, where micro-credit is known to be quite developed, the interest rates on
micro-loans are abnormally high and have remained so for a long time. For example, in
Bangladesh, interest rates on loans from hundreds of microfinance institutions (MFIs) were very
high. The effective interest rate was 40-45 per cent and there was no sign of change in interest
rate for many years until intervention by PKSF. The foundation of modern microcredit rests on
the belief that poor clients are credit starved and their main concern is access to loans rather than
interest rates. Many studies have revealed that price is a low priority for clients, relative to
product-related factors (such as loan size) and service-related factors (such as time for
disbursement or time spent at group meetings).
Experience of group-based lending indicates a rising evidence of multiple borrowing from
different MFIs due to unhealthy competition or lack of market information. The experience of
the micro-credit sector in some other countries suggests that certain facilities should be in place
for a sustainable reduction in interest rates. These conditions apply to both the supply and
demand sides of the market.
There was a demand from civil societies for reduction of interest rate. The borrowers were
reluctant to respond as they were happy with the credit available to them. The initiative first
came from PKSF. The competitive interest pressure is compensated by externally imposed caps
from PKSF and political leadership. PKSF first announced fixation of interest rate at a maximum
27 per cent for the borrowers financed by non-governmental organisations (NGOs) funded by it.
It also persuaded the government and Microfinance Regulatory Authority to fix the interest rate
cap for micro-credit. Bangladesh experience shows that, as access to micro-credit broadens in a
country, pressures on interest rates grow-if not from clients directly, but indirectly through
regulators and policy makers.
MFIs also get funds from overseas donors and face competition from others. In addition to MFIs,
commercial banks in Bangladesh are also engaged in delivering micro financial services. Given
countrywide branch network and availability of adequate fund, commercial banks have

enormous advantage to provide microfinance among the poor.

The micro-credit sector faces a market challenge with the entry of new NGOs who offer lower
interest rate and better service with innovative products. Bangladesh experience suggests that it
is not inevitable that price competition will sharpen as markets develop-or at least, there can be
significant delay in market development.
Competition is generally expected to benefit the consumers (borrowers) by offering a wider
choice of products (micro-credit plus) and service provider NGOs become efficient with better
service, and lower prices (interest rate and service charges). A competitive market is one in
which, (i) on the demand side, consumers have an effective choice of providers and the ability to
distinguish among them and, (ii) on the supply side, providers need to take into account other
providers' behaviour while deciding the terms and conditions of the products and services they
offer. The credit providers place a lot of value on quality service, flexible product characteristics,
and the availability of upgraded small loan or medium loan for more formal business. The
service charges apart from interest and the methods of collection of loan is a determining factor
for the borrowers. The service charges are instrument of MFI to hide the cost of funds which is
very difficult for poor and illiterate borrowers.
But the awareness of and sensitivity to interest rates is likely to increase over time as
microfinance clients become more experienced and sophisticated borrowers. Likewise, interest
rate sensitivity is likely to increase as clients become more literate and educated. The success of
microfinance creates disciplined, better-off clients who are more attractive for a range of lenders.
The emergence of these borrowers will likely increase client price sensitivity.
When firms come to believe that clients will respond to price incentives, they feel encouraged to
consider reducing interest rates. Demand-side factors tend to exert a push toward greater interest
rate competition over time. However, pricing competition alone does not mean that overall
market interest rates will necessarily decline over time. They may not change due to interest rate
cuts among a few small providers, since the big MFIs has market reputation and market
penetration process. Hence the effect of the interest rate cut is very minimal.
As banks enter micro-credit markets increasingly, MFIs will be forced to compete against wellestablished financial organisations. MFIs will find soon that they need a sound branding strategy
to face the challenge. They need to start investing in building a strong brand image.
In order to reduce the interest rate and improve the service, the idea of "micro-credit plus"
emerged with new products of health, education, housing, pure drinking water, social justice etc.
The competition has been based mainly on particular features of the loan products and services
and brand of MFIs.
The donors now feel concerned about the competition within and among MFIs and also welfare
of the borrowers as they are interested in promoting pro-consumer micro-credit. They are putting
pressure on their beneficiary MFIs to collect and disseminate credible market information,
enhance consumer education and improve financial infrastructure, such as credit bureaus and
also training and support for financial regulators and competition authorities. They would like to

see strong MFIs, fair competition and maximum benefit of borrowers.

The competition policy includes competitive locations-opening new branches in under-serving
areas, making loan terms more flexible, for example, by allowing longer, larger loan amounts for
first and subsequent medium and small loans. The credit includes micro-credit plus products as
other loan types, such as remittance of expatriates, housing, or other financial services, like
savings or insurance linked to the loan and improved service to reduce the time for processing
application and disbursement of loan. The health insurance, health care service and other value
added services are adding further value to the micro-credit programmes.
PKSF was established in 1990 with the objective to provide assistance through micro-credit
funding and institutional capacity building for microfinance institutions (MFIs) and nongovernmental organisations (NGOs) that provide micro-credit loans to poor populace in the
country. PKSF is a public-private organisation that does not directly lend to clients but serves as
an apex organisation, providing funds to MFIs, building capacity, giving support and networking
with international organisations and government. PKSF has helped many MFIs to move toward
sustainability. It has also developed several policies and a quality system with a total of 100 plus
performance indicators (for viability of borrowers and institutions) and ratings for each indicator.
It also lobbies with the government for a good regulatory framework.
In addition to the benefits to the consumers, fair competition in this sector enables more NGOs to
survive and grow. PKSF had 273 partner NGOs and 6968 branches till 2015. It has a controlling
influence in micro-credit sector and as finance provider and regulator is in a position to develop
completion among NGOs.
The newly established Competition Commission may also have an effective role to play to
increase competition in the micro-credit market.
The writer is a Legal Economist.
mssiddiqui2035@gmail.com