Borrowers are trapped in a vicious cycle – taking out new loans to repay previous ones
Between 2010 and 2018, loans disbursed by microcredit organizations grew manifold, although the growth in the number of borrowers was insignificant in comparison.
The 2010 annual report of the Microcredit Regulatory Authority (MRA) – the authority responsible for publishing the annual reports of Microfinance Institutions (MFIs) - showed that microfinance institutions distributed Tk306.72 billion among 19.21 million borrowers.
In 2018, the total number of borrowers increased to 25.38 million. However, surprisingly, Tk1,201.91 billion was distributed among these borrowers.
The loan amount rose 392 percent in nine years although the number of borrowers increased by just 32 per cent. This a clear reflection of how MFIs are targeting the same borrowers multiple times in pursuit of raising their portfolio.
The MFIs' tendency to approach in-debt borrowers to maximize their portfolio yield, however, poses a significant threat to both the MFIs and the borrowers.
New and existing MFIs operating on the market are adopting aggressive approaches to increase their loan portfolio.
As part of the aggressive strategy, for example, the loan officers of MFIs are given targets to increase the number of loans. Consequently, a recent study by the Palli Karma-Sahayak Foundation (PKSF) on microfinance shows that more than 40% of the households in Bangladesh took out more than one loan.
In such circumstances, borrowers are trapped in a vicious cycle. It is increasingly difficult for them to manage repayments, so borrowers take out further loans to repay their previous ones.
Therefore, microfinance institutions – a much-hyped tool to alleviate poverty – have become a burden in poor borrowers' livelihoods.
In pursuit of fixing the issues with MFIs, and turning them into pro-poor finance institutions, the concerned authorities – like the MRA, Bangladesh Bank, donors, and top management of MFIs – could consider the following policies.
Firstly, the MRA should take effective measures to track multiple lending and act immediately to curb such aggressive operations. An index could be developed to measure the debt-burden ability of the borrowers. An MRA policy guideline in this regard could also be developed and strictly imposed on all existing MFIs and those who want to apply for new registration.
Therefore, MFIs should proceed with lending in accordance with the findings of the index and the MRA policy guideline.
The MRA should pay surprise visits to MFIs to determine the real situation on the ground level. In the meantime, the MRA should take action to handle the operation of unregistered and underground MFIs on the market.
Secondly, Bangladesh Bank must reinforce the MRA to maintain balanced and productive financial inclusion by providing financial, technological and skill support.
Finally, Bangladesh Bank, the MRA, MFIs, nongovernmental organisations (NGOs), and the PKSF should promote financial literacy and awareness about multiple borrowings and over-indebtedness among borrowers.
Microfinance is a much-hyped tool to alleviate poverty. The primary objective of microfinance is to assist the poor in gaining self-sufficiency through entrepreneurial activities. Consequently, the microfinance model has been established in various parts of the world to fight against poverty.
However, over time, the noble objective of microfinance – to help the poor – seems to have been overtaken by microfinance institutions' profitability and financial sustainability.
Donors have questioned the need for continuous subsidies which have resulted in many NGOs focusing more on financial sustainability and leaving behind their mission of helping the poor.
It is necessary to take immediate measures to revisit current microfinance operating trends. The authorities concerned should strictly monitor microfinance operations and take corrective steps to ensure its noble role – as a savior of the poor instead of a profit-oriented business institution – and prevent borrowers from being dragged down.
Md Sohel Rana is a Phd scholar at the Faculty of Business and Accountancy, University of Malaya and Dr Hasanul Banna is a Research Fellow, UAC, Faculty of Economics and Administration, University of Malaya