Microcredit booms as rural people opt for hassle-free loans

Highlights 

• Loan disbursement surges by Tk40,671cr in FY22 compared to FY21
• Disbursement in first half of FY23 is more than Tk1 lakh crore  
• In FY22, the microcredit growth stands at 27%  
• New 222 institutions get regulatory approval in one year   

After two years of pandemic struggles, small businesses and entrepreneurs in rural Bangladesh started to turn around last year driving up the credit appetite for household-owned workshops, agriculture, cattle farming, fisheries and three-wheelers.

In addition, the war-fuelled inflation has also forced many to turn to micro-loans to meet needs.

Data shows that the disbursement in the first six months of FY23 is on an uptrend to Tk1.10 lakh crore.  

In FY22, the microfinance institutions disbursed loans of around Tk1.92 lakh crore, which marks an impressive 27% year-on-year growth.   

Besides, some 222 new micro-lenders were approved in the last 14 months to meet the burgeoning loan demand, according to the Microcredit Regulatory Authority (MRA).   

According to the Microcredit Regulatory Authority, MRA-licenced microfinance institutions disbursed more than Tk1.91 lakh crore in FY22 – up from Tk1.51 lakh crore in FY21 and Tk1.36 lakh crore in FY20.

According to the regulator, most of the newly approved micro-lenders have already started operations, while, sources said, local consumer goods giant Pran-RFL has recently taken a microcredit licence as the rural micro-lending looks promising.   

Md Fashiullah, the executive vice-chairman of the Microcredit Regulatory Authority, said small entrepreneurs, traders and farmers are trying to shake off the pandemic shock, which has driven up the microcredit disbursement.  

"Besides, formal loan facilities have not reached many people in faraway coastal, haor and char regions, while some new rural ventures have emerged over the years with new credit appetite. Considering these, the new firms were provided with initial approval to conduct lending operations," he told The Business Standard.

Of the newly approved lenders, three have qualified for the final licence in less than a year, said Md Fashiullah, adding they have logged specialised and bright performances in agri production, supply and marketing.

Cashing in on banks' reluctance

According to sector people, many small businesses and rural ventures, which were forced to wind up their activities during the pandemic, have been trying to turn around since last year. 

Though the government announced Covid stimulus packages for the cottage, micro, small and medium enterprises (CMSMEs), banks cold-shouldered them while disbursing loans from the fund. Therefore, the small ventures had to take loans from the micro-lenders even with a higher interest rate. 

Besides, people who lost jobs during the pandemic and slipped below the poverty line also availed of small loans for their livelihood. Disbursement data show small businesses, cattle rearing, fisheries and three-wheelers and motorcycles top the microcredit. 

Amit Kanti Sarkar, head of Brac's microfinance programme, said they saw the credit disbursement registering negative growth in 2020 and 2021 as small entrepreneurs had been struggling to stay afloat.

"Now they are trying to turn around, pushing up the credit demand for small ventures, agriculture and fisheries. Brac witnessed around 30% growth in credit disbursement last year," he told The Business Standard. 

In the last year, around 3 crore people borrowed from microfinancing institutions as the lion's share of the money went to micro-enterprises. The leading lenders include Brac, Asha, Jagorani Chakra Foundation, Padakhep Manabik Unnayan Kendra, United Development Initiative and Sajeda Foundation, 

Apart from the MRA licenced institutions, Grameen Bank and various public microcredit agencies also witnessed a rise in lending last year.   

Grameen Bank disbursed loans of Tk20,657 crore in FY22 – up from 19,547 crore in the previous year. Public micro-financiers disbursed Tk9,553 crore in FY22 as the amount was Tk2,657 crore in FY21.

According to the Palli Karma Sahayak Foundation (PKSF), a financial institution that finances the micro-lenders, PKSF-affiliated micro-financiers are now offering loans up to Tk10 lakh to a single customer.  

PKSF Chairman Qazi Kholiquzzaman Ahmad said the scope for microfinance is expanding thanks to better rural infrastructure and people's ambition to ride out of poverty. 

He believes as banks are yet to offer services in remote coastal, haor and char areas, new micro-financiers still have many unexplored areas, communities and marginalised groups.    

South Asian Network on Economic Modeling (Sanem) Research Director Sayema Haque Bidisha pointed out that red tape and bureaucratic hassles of the formal banking channel have contributed to the recent microcredit boom.

"Small entrepreneurs don't want to go through the complicated bank borrowing process. Therefore, small businesses and common people prefer loans from microfinance institutions even at higher interest rates," she told The Business Standard. 

According to the central bank, some 61 banks including state-owned, private and foreign are operating in Bangladesh with nearly 11,000 branches.  

Inflation drives loan appetite

Inflationary pressure arising from the Russia-Ukraine war also created pressure on the rural households, especially marginal people who were forced to borrow for their livelihoods.

The inflation rate hit a decade high of 9.52% in August, inflicting marginal people the most. Gas price hike in the recent past also fueled the prices of commodities further. Food inflation reached double digits with no signs of a quick return to manageable levels despite a decline in the global markets.

Bank deposits have also declined because of people are eating up their savings.

Sayema Haque Bidisha, research director of SANEM, said rising inflation might have forced rural people to resort to microcredit, but she has no study on the issue.

Amid this situation economists recommended raising allocations on social safety net to safeguard marginalised communities.   

Pran up for microfinance 

In February 2021, the microcredit regulator sought applications for microcredit operations and subsequently 1,140 institutions applied. Of them, 222 institutions have been given initial approval till January.

According to sources, local agro-product giant Pran-RFL has acquired the microfinance licence under the banner of "Agri Development Foundation". 

However, Pran Group did not comment on when it will start operations in which region of the country.

Besides, former CEO of Microsoft Bangladesh Sonia Bashir Kabir has acquired a micro-lending approval named SBK Foundation.

To qualify for the final licence, the initially approved institutions will have to attain a credit disbursement status of Tk1 crore and 1,000 members within three years from the commencement of operations. 

Currently, the number of microcredit institutions finally certified by the microcredit regulator is 738.