Bangladesh is transforming soft loan dependency to a model of sustainable financing

Suman Chakma, Joint Director, Microcredit Regulatory Authority of Bangladesh

Microfinance in Bangladesh started in 1970s, led by reputed NGOs like Grameen Bank (GB) and BRAC. The initial success of microcredit services encouraged other NGOs to enter the market, and by the early 2000s, more than 350 organizations were involved. Donor funds and low-interest loans from the Palli Karma Sahayak Foundation (PKSF), a specialized institution for poverty alleviation through employment generation, supported this mushrooming growth.

Recognizing the need for regulatory oversight, the Government of Bangladesh established the Microcredit Regulatory Authority in 2006. Today, a total of 721 Microfinance are registered with MRA.

Since MRA’s inception, mandatory licensing for microfinance operations has enhanced the credibility of the microfinance sector. Regulatory frameworks and supportive policies have encouraged MFIs to diversify their funding sources, including three types of savings (compulsory, voluntary, and term), loans from banks and financial institutions, funding from reputed national or international organizations, and loans from individuals. In 2023, MRA issued a guideline on issuing bonds to raise funds from the capital market.

Since MFIs in Bangladesh are structured as non-profit concern, they cannot distribute dividends; instead, retained surplus funds are reinvested into the loan revolving fund. With prior approval of MRA, MFIs may use funds from retained surplus for social development activities such as disaster management, health programs, education programs, orphanage support, or relief distribution.

The cumulative retained surplus (own fund) changed the financing landscape of the microfinance sector, contributing 33% of the sector’s financing in 2023, compared to just 5% in 2003. While dependency on soft loans has reduced drastically, bank financing increased to 17% in 2023. While financing from member’s savings has remained largely unchanged, new funding opportunities from the capital market are increasing gradually.

Hence, through regulatory innovations and timely policy frameworks, the financing landscape of Bangladesh’s microfinance sector is gradually shifting from soft loan dependency to a model of sustainable financing.

Source: CDF microfinance statistics 2003 & MRA annual report 2023