Since the liberation in the 1970s, microfinance in Bangladesh has become a major part of development. The idea behind microfinance originally was to help the world’s poor. Thus it will provide them with a solution to make their lives better.
However, the sad reality of our country today is that we are the masters of ruining great things to meet our convenience. From exploiting ride-sharing services to tweaking with CNG meters, our innovation oozes out when it comes to vandalizing the system. Something similar happened to microfinance in Bangladesh as well.
The initial success of microfinance
Pioneered by Grameen Bank’s founder and Nobel Peace Prize Winner Muhammad Yunus, microfinance provides the poor people with banking services that, given their circumstances would otherwise be out of reach.
Microfinance empowers the poor to take control of their own lives and pave their own path out of poverty.
Restructured as microcredit and more recently, financial inclusion, it is now dominating the social investment sector and also obtaining something of a revolution following in the process. Described as transformative, the craze has continued despite the growing academic evidence that questions its longevity. The success of microfinance in Bangladesh has even reached numbers across borders.
In a 2007 survey, Bangladesh was on top of the 15 countries which were benefited from microfinance penetration.
Let’s have a look at the survey:
Compared to Bangladesh, during the 2000s, the interest rates in countries like Zambia and Mexico, went up to more than 200%. So rather than reducing, few countries actually worsen poverty in the areas where they introduced microfinance.
So this goes to show that, Bangladesh actually could crack the success formula for microfinance initially. However, we could not keep that success going for too long though.
Why Microfinance in Bangladesh fail?
The significant reasons microfinance in Bangladesh fails
With the commercialization of the microfinance industry that took place in the 2000s, many people started getting involved in microfinance to become commercial entities. This has to be one of the major reasons why microfinance in Bangladesh failed.
But wait, that wasn’t the only reason why microfinance failed in Bangladesh. There are many more reasons that influenced the failure of microfinance in Bangladesh. Let’s have a look at them.
Things to consider
Lack of proper market research before investing: The biggest reason investors don’t succeed in microfinance in Bangladesh is because they don’t do proper market research before investing the money.
And when they start the microfinance ‘business’ and don’t succeed in it, they can’t figure out why the business is not flourishing. The reason is obvious.
Where you are targeting to start the business, if they don’t have a need for microloans, then the entire business idea would go to waste. So do proper market research before investing in microfinance.
Not having the right intentions:
A microfinance investor can become a businessman but a businessman can hardly become a microfinance investor.
It’s a simple equation, if your only intention is to earn money from this venture then let me tell you, the microfinance sector is not for you. The microfinance industry has also become a victim of its own success.
Massive growth of profit-seeking microfinance programs have led to a very tough competition in the sector. With some institutions surrendering to a ‘competition for clients’ in order to increase their profitability and to attract lenders, the survival of microfinance in Bangladesh is now being questioned.
Doing proper research on the loan borrowers was not getting enough importance. Microfinance’s long-term enemy has always been the reason that people were unable to pay back the money they borrowed.
Not capitalizing on the software solutions: With the advancement of technology now everything can be done through automation. And microfinance also falls into this category. The good news is, there are many software companies now in Bangladesh that are building products and services to make the microfinance system easier than ever.
How Software Companies can Aid in this situation
The good news is, there are many software companies now in Bangladesh that are building products and services to make the microfinance system easier than ever.
One of the largest CMMI level 5 appraised software companies in Bangladesh, Southtech is one of them. In the growth of microfinance in Bangladesh, Southtech’s microfinance software Ascend Financials is contributing a lot more than one would imagine.
Ascend Financials is the all-around microfinance software solution that helps microfinance institutes to enable financial inclusion. Designed for microfinance institutions and banks, this solution of Southtech simplifies your everyday complexities. Ascend Financials will help you through branchless banking, online/offline data collection services, reduced paper costs, overall information of your client’s portfolio and a regulatory friendly solution.
Budget Restrictions: No matter what people tell you, know that microfinance is not your typical commercial banks that start with a huge amount of investment. If you look at organizations like BRAC, Grameen Bank that invested in microfinance in the initial years, they didn’t have a very humongous budget. They actually started with a small amount and as the business progressed, the money started flowing in.
Microfinance has huge scope for profit, you just need to be patient with it. Giving out loans to people isn’t as glorious as the mainstream media makes it look like. Restrictions of budget is a major reason it fails in Bangladesh.
More influencing factors
Improper Regulatory System: Improper regulatory system is the reason why many organizations hesitate to give out loans. Because no one would want to provide loans if there is no guarantee that if their provided money will be used for the right reasons or not.
This lack of proper regulatory system contributes to another big issue facing microfinance, that is a huge number of loans are used to fund day to day expenses rather than income-generating initiatives.
A study conducted in 2015 showed that in South Africa 94% of microloans were being used simply to fund day to day expenses. In these situations, those borrowing do not generate any new income or even better their current situation. That is why, making the repayment of the initial loan becomes difficult for them, which forces them to take out more loans. Thus they get into more debt.
Borrowers having easier access to microfinance initiatives have been known to then lend to poorer borrowers at higher interest rates than what they themselves received.
Also, the poorest micro-entrepreneurs are benefiting less than the less poor people. In a circumstance that strengthens existing socio-economic hierarchies and creates greater room for exploitation.
So from lending loans to getting back that payment, every process should be monitored thoroughly and have a proper regulatory system.
Future Prospects of Microfinance in Bangladesh
An integral part of microfinance’s appeal is based on the fact that microfinance does not threaten existing political or economic structures in any way. It is simple and highly customizable. The poor can be saved by the rich, and by doing so, the rich become richer.
A win-win situation for all. What’s not to like about that? It’s the digital dream!
Now many people might want to know what are the changes to make the best out of the existing microfinance institutions. The answer to this question isn’t as easy as many people would think. There are many influencing factors that need to change in terms of getting better services out of microfinance.
make the best out of the existing microfinance institutions. The answer to this question isn’t as easy as many people would think. There are many influencing factors that need to change in terms of getting better services out of microfinance.
For starters, let’s have a look at a basic theory of change that may help the current situation of microfinance in Bangladesh
A report consisting of seven different micro-credit modules of many countries all around the world showed that the existing processes that financial institutes were using were not very fruitful. Those modules had a lot of loopholes for fraud lenders to take advantage of. So some major changes happened.
Where in many countries the rich are getting richer and the poor are getting poorer, through microfinance, Bangladesh aims to bring equality to the economy as much as possible.
If the reasons why microfinance in Bangladesh is failing to get resolved then many more opportunities for success would open up for this industry.
Some of the major ones would be:
- Women oriented microfinance schemes
- Automation of microfinance system
- Microfinance sector as an opportunity for commercial banks
- Diversification of products
Women oriented microfinance schemes: Women hold a large percentage of the microfinance loan borrowers. So when all the issues mentioned above are solved, it will be easier to empower women through microfinance.
The women who actually want to get empowered are the ones who need to be the main focus of future MFI schemes.
There is no denying that these prospects are helping the rural women already. However, the number can be higher.
Automation of microfinance system: The automation of microfinance system is already here. But the prospect of growth is immense in this sector. So the more microfinance institutions convert to the automation system, the faster the growth graph would go up.
This is where the role of software companies like Southtech come in. Their ever upgrading software systems can make automation of microfinance system easier than ever. The system itself will allow all the loan lenders and borrowers to track their transitions smoothly.
Microfinance sector as an opportunity for commercial banks:
Microfinance is not just a small part of the economy anymore. It is a complete industry in itself now. The growth of microfinance in recent times has been immense. Now it’s safe to say that, microfinance sector is a great opportunity for commercial banks to explore this industry.
Also, when commercial banks will start investing more in the microfinance sector, then the financial aspect will vastly improve.
Diversification of products: Microfinance doesn’t just offer you one or two products. Many products serve this noble cause. Let’s take care of all the influencing factors and experiment with more new products.
The scope for microfinance to flourish in Bangladesh is immense. But what happened? How did we reach a point where now we have to worry about the existence of microfinance in Bangladesh?
Now there can be many reasons for the failure of microfinance in Bangladesh. One can blame the international interference for it. Also, the greedy businessmen can be the ones to put all the blame on.
However, there won’t be any possible solutions if we just keep pointing fingers at one another. It is apparent that MFIs didn’t only work hard to make a mark in Bangladesh. It also paved the way for the future generation as well. We can’t let this precious concept go to vain.
Even though things have not gone out of hand yet we actually don’t have too much time to mend things. Because if we have to reach the 2025 vision then things need to change as soon as possible.
