Bangladesh: MFIs Warned of Failing to Comply with MRA Rules

Aug 2014
Bangladesh, August, 19 2014 - The regulator has warned micro finance institutions (MFIs) against non-compliance with the required provision for allowing 15-day grace period before starting recovery of loan installments.

According to a recent circular, the Microcredit Regulatory Authority (MRA) also asked the MFIs to follow 'declining balance method' for deducting loan and interest through installments and to provide 6 per cent interest to the depositors over weekly mandatory deposits.

"We have been receiving complaints that the MFIs have not been following the rules and regulations with regard to the grace period, declining balance method and interest rate on weekly deposits, which is a violation of the MRA law and regulations," said a MRA director.  

He said some of the MFIs recover loan installments without giving 15-day grace period whereas it is clearly mentioned that borrowers are entitled to it.

The MFIs also use flat rate during calculation of installments whereas they were directed to follow declining balance method.

He said while using the 'declining balance method', interest calculation is based on  outstanding loan balance, the balance money that remains in the borrower's hands as the loan is repaid during the loan term.  As the borrower repays installments, the remaining loan balance declines over time. Interest is then charged only on the loan amount that the borrower still holds. The idea is that the borrower will only be paying interest on the actual money he or she has in hand at any given time.

"Declining balance method is a win-win situation for both the borrowers and the MFIs, but as per the flat rate method, interest is charged on the full original loan amount throughout the loan term, rather than on the money that the borrower actually has in his/her hands," said the MRA director, adding that the borrower loses due to the method.

The MRA will take punitive action if any MFI is found to be violating rules and regulations, the circular says.

Currently, 696 MFIs are registered and 92 have got licences temporarily from the authority. These registered NGOs are serving more than 40 million out of the country's 160 million people, according to the latest data of the MRA.

With a view to bringing the MFIs under a regulatory framework, the then government in July 2006 enacted the Microcredit Regulatory Authority Act, 2006 (Act No. 32 of 2006), which became effective from August 27, 2006.

The MRA is now in a process of granting licenses to more 350-400 MFIs.


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