Micro-credit under scrutiny

Oct 2006
Bangladesh , October, 05 2006 - It is now mandatory for all micro-finance institutions (MFIs) to take licence from the regulatory body for operating their activities in Bangladesh. The newly formed body -- the Micro-credit Regulatory Authority (MRA) -- has set February 26 as the deadline to apply for fresh operating licence in line with the existing micro-credit regulatory act.

A report published in The Financial Express (FE) suggested that no MFIs can run their operations without taking licence from the micro-credit regulatory authority. The MRA is expected to scrutinise the sources of funds, ownership, internal governance and the real financial picture of the MFIs before issuing licence. The authority will invite application for licence through publishing advertisement in the national newspapers soon.

The Act was passed in Parliament in early 2006 and has come into effect since August 27 last to bring all operating micro-finance institutions under a regulatory body for ensuring transparency and accountability in their activities. Under the existing rules, an MFI may face a penalty Tk 0.1 million, which may go up to Tk 0.5 million if it operates without registration and gets involved in activities defying directives of the authority. The authority will monitor the activities of the MFIs and impose penalty in case of any unlawful activities detected in any non-governmental organisations (NGOs) engaged in micro-credit operations.

But many NGOs including grassroots level micro-credit practitioners criticised the passage of the Bangladesh Micro-Finance Regulatory Authority Act. They said the regulation, mainly meant for the banking sector, is too tough to run the activities of small micro-finance institutions. The micro-finance practitioners observed that an uneven competition has arisen among such operations, which is proving to be a challenge for the operators. There is a need for maintaining a common ethics on micro-finance, which should be based on social commitment, philanthropy and charity, they said.

However, the government is making provisions for launching small capital banks to extend micro credit-facilities to the villages across the country under the Act. Commenting on the regulatory authority, Prof Muhammad Yunus of the Grameen Bank appeared to be upbeat. He said the law would be beneficial for the micro-credit providing organisations. The micro-credit providers under this initiative will no longer need to collect money from different sources as they will have their own funds, he added.

The micro-credit institutions in Bangladesh have so far been operating without any regulatory body. The new law is expected to ensure their accountability. The micro-credit institutions will be able to collect deposits only from members, while small capital banks will have the authority to collect deposits from anyone within their command areas. However, both of them will have to provide credit to assist the lower income group people to help them become self-reliant. There will be five types of small capital banks on the basis of their functional areas.

As per the new Act, both the existing and new micro-credit institutions will have to take fresh approval from the MRA. They will not be allowed to run activities, transaction or to provide services that contradict the purpose and spirit of the law. The law also says if any institution wants to launch poverty alleviation activities, it must have approval from the regulatory authority. Each institution will have to have a minimum reserve as specified by the law, and its money cannot be spent without approval. No institution will be able to distribute the profit without the authority's permission.

The government-run micro-credit activities will also come under this law. The regulatory authority has the right to approve and cancel any small capital bank or micro-credit institutions or their branches. In case of small banks, it will decide the ratio between deposit and interest, and formulate policies if it wants to merge small banks or their branches into one.

A study by Charles H. Kennedy provides a lucid account of the growth of NGOs in South Asia, but more particularly in Bangladesh. According to the study, Bangladesh is perhaps unique in the sense that of all the states it is the most involved one in voluntary efforts in health, literacy, poverty alleviation and women's empowerment, and perhaps most dependent on NGOs in these fields.

It could be said that the pattern of growth within the voluntary sector in Bangladesh did not follow the natural path. If the idea was to complement and support the efforts of the existing institutions in delivering the required services, then it is obvious that things went too far. Various NGOs, by virtue of their technical and financial prowess, were able to command a unique position, which later on took them to yet higher levels, a situation where their activities vis-a-vis the government became mutually exclusive. In fact, such NGOs in Bangladesh appear to be running parallel government. They bother a little for government instructions. But what is good to be noted here is that the founder of the largest NGO in Bangladesh commended the government action of establishing the Micro-credit Regulatory Authority.

The MFIs or NGOs, which would provide the best input and best service to the community, would survive and those unable to perform well will obviously whither away. A possibility is that the foreign NGOs may have an edge over the local NGOs in the sense that they have a greater advantage by virtue of greater resources and skills from all over the world. In the process, the local ones can mutually collaborate to enhance their skills and become more beneficial to the society since they have the advantage in terms of a better understanding of local communities and problems. The MRA is expected to help these MFIs or NGOs through extensive monitoring and supervision of their activities. Their activities must be streamlined.


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