In Bangladesh, inception of the formal financial system for providing rural credit started with the establishment of the Agricultural Development Bank in the 1960s. Later, the government also encouraged commercial banks to set up branches in rural areas for financial inclusion. In 1977 a special agricultural credit programme called, "Matir Dak" was launched. As a result the number of branches in rural areas increased tremendously. The rural branches were engaged both in collecting savings and providing credit.
However, on a close scrutiny, it was observed that the access to finance was provided mostly to large and medium landowning households and big traders and fishermen. The landless and marginal farmers remained excluded from the market. A survey conducted in 1982 jointly by the International Food Policy Research Institute (IFPRI) and the Bangladesh Institute of Development Studies (BIDS) revealed that 62 per cent of rural households obtained loans from informal sources, most of whom were smaller landowning groups. Only 14 per cent of rural households could access loan from financial institutions that contributed to 25 per cent of total loans received by rural households. The recovery of loans from the financial institutions was very poor, and transaction cost of the loans was high due to the small size of loans. Many financial institutions, however, showed fictitious record of good recovery by re-scheduling the overdue loans into current loans and even showed profits in the books by charging interest on overdue loans. To control this phenomenon, Bangladesh Bank introduced a policy of classification of loans according to the recovery rate and keeping provision for loan loss according to quality of loan portfolio. As rural branches started accumulating losses, many commercial banks closed loss-making rural branches from the mid-1980s.
According to critics, the history of government's involvement in extending agricultural credit to rural households is a narrative of frustrations and wasteful endeavours. The loan recovery rate against outstanding loans averaged 22 per cent during 1998-2010. The annual rate of increase in disbursement averaged 17 per cent and the annual rate of repayment averaged 12 per cent. This gap between rates of disbursement and repayment resulted in accumulation of outstanding loans. A World Bank study reports that the importance of banks and cooperatives in rural lending has declined over time while the importance of microfinance institutions (MFIs) has increased.
Recently, some qualitative changes have been introduced to the credit delivery system that contributed to improvement in the credit business targeted for farmers and small enterprises. The monitoring cell of the Central Bank has been strengthened for ensuring transparency in the credit business and reducing the transaction cost for obtaining credit by borrowers. Priority is given to credit support for women in agriculture to increase women's participation in economic activities. Emphasis has been laid on development of marketing facilities for agricultural products to ensure fair price. Priority has also been given to reach credit to relatively impoverished and neglected regions such a char (island), haor and coastal areas. The central bank made it mandatory for the state-owned commercial banks as well as the private and foreign banks to allocate at least two per cent of their loan portfolio for agriculture.
Another innovative step towards financial inclusion is the opening of bank account by all farmers at a minimal charge of Tk.10, so that credit, subsidies and other government transfer could be directly deposited to the farmer's account. This has helped reduce leakages in the implementation of the government's agricultural subsidy and the 'safety nets" programme. Bangladesh Bank has brought 13.2 million people under banking service that includes farmers, hardcore poor and unemployed youth.
A review of the microfinance industry conducted by some prominent social scientists of the country for the 10 largest MFIs (with a membership of over 200,000) revealed the following:
n There is a high concentration in the microfinance market. Three largest MFIs, Grameen Bank, BRAC and ASA accounted for about 70 per cent of the microfinance portfolio, and the 10 largest accounted for 87 per cent.
n The average loan balance per borrower has increased from US$71 per borrower in 2005 to US$ 115 in 2009, about 20 per cent of the per capita gross national income.
n The products include not only credit but also savings and micro-insurance. About 40 per cent of the MFIs provide insurance for various purposes, including exemption of outstanding loan when the borrower accidentally passes away, the funeral expenses, and for major health hazards such as accident, death of livestock etc.
n The efficiency in loan operation is very low. The cost of operation was about 14.6 per cent of the outstanding loan, compared to 17 per cent in Asia and 20 per cent at the global level.
n The average yield (income from service charge) was about 23 per cent compared to a 27 per cent interest rate cap introduced by the Micro-credit Regulatory Authority. With a cost of loan fund of about 9.4 per cent, the cost of servicing the loan at 12 per cent, and a provision for bad debt of about 3.0 per cent, the MFIs were able to make some surplus in the credit business. The surplus is accumulated as retained earnings which is an important source of loan fund.
n The portfolio quality is not so impressive compared to international standard. The portfolio at risk (overdue loans for over a month) was about 6.6 per cent for the top three MFIs and about 4.9 per cent for the others.
The writer, a former Professor of Economics at Jahangirnagar University, is currently Chair, Department of Economics and Social Science (ESS),