History of microfinance in Bangladesh: A life cycle theory approach

Abstract

This study aims to conceptualise and document the historical evolution of microfinance in Bangladesh using the life cycle theory (LCT). Based on the LCT nomenclature, the microfinance sector in Bangladesh shows characteristics broadly consistent with the saturation phase (2006–2015) – which potentially has adverse impacts on both microfinance clients and institutions. The maturity phase (1996–2005) of microfinance has corresponded with competition and several innovations (financial and non-financial). However, the saturation phase sees increasing presence of uncoordinated microfinance institutions and expansion of multiple borrowing, as well as commercialisation and ‘mission drift’, which constitute important challenges for the regulatory authority and management of microfinance institutions.

Keywords:

• Microcredit and microfinance
• microfinance institutions
• multiple borrowing
• life cycle theory
• Bangladesh

Acknowledgement

We are very grateful to Professor Andrea Colli and several anonymous reviewers for their constructive comments and suggestions on earlier versions of this article. Their thoughtful remarks have substantially improved the quality of the article. The first author also acknowledges informal academic discussion with Dr. Zhang Cheng (Dana), Dr. Hasanul Banna, Dr. Muhammad Mehedi Masud, Dr. A.S.A Ferdous Alam, Dr. Abu Hanifa Md. Noman bin Alam, Shamima Nasrin, Halima Begam Shilpi and Khaled Saifullah on various occasions while preparing this manuscript. All errors that remain are our own responsibility.

Notes

1. For a brief history of other countries microfinance market, see, Kabir Hasan (2002).

2. The two bottom lines or ultimate goals of microfinance are ‘financial sustainability’ and ‘social outreach (sometimes referred to as outreach only)’.

3. GB, which literally translates into ‘village bank’, is one of the largest MFIs in Bangladesh that serves small-scale loan facilities to over seven million people. Although the history of GB can be traced back to 1976, GB was only officially established in 1983 as an independent bank by government legislation. Currently, 90% share of the bank is owned by its borrowers and the remaining 10% by the government.

4. For brevity, we assume the homogeneity between product life cycle and industry life cycle.

5. Vernon (1966) had analysed the phases of new product launch, maturity and decline, and how multinationals determine location decisions on the basis of these phases.

6. A comprehensive definition of mission drift can be found in Mia and Lee (2017).

7. Loan size and definition of what constitutes ‘the poor’ greatly varies between countries. According to World Bank (2017), Bangladesh has approximately 28.1 million poor people in 2010, each earning less than US$1.9 a day. Average microfinance loan size (disbursement) in Bangladesh was approximately US$379 (BDT31,154) in 2015 (MRA, 2015).

8. Maturity and saturation are sometimes combined together to form a single stage in LCT.

9. Chittagong is the commercial capital of Bangladesh and second largest city after Dhaka. Please see Mia, Nasrin, Zhang, and Rasiah (2015) for more details about the city.

10. Please see Islam (2012) for a detailed policy climate during that time in Bangladesh.

11. Awards include the Nobel Peace Prize, Presidential Medal of Freedom (the Highest Civilian Honour in USA), Congressional Gold Medal (USA) and honorary doctorate degrees from over 20 countries. Additionally, Yunus also received the highest national awards in Bangladesh including the Presidents’ Award, Central Bank Award and Independence Day Award among others.

12. For example, BRAC is operating in several countries, including Afghanistan (since 2002), Pakistan, Myanmar, Sri Lanka, the Philippines, Haiti, Sierra Leone, Liberia, Tanzania, and Uganda.

13. SafeSave was established in 1996 as an MFI, which works in eight low-income areas in Dhaka. Currently, it is now a project of BRAC. For more details, see http://www.safesave.org/home.

14. For more details, see http://www.brac.net/education-programme/item/761-brac-primary-schools

15. Due to small average loan size, people may borrow from various MFIs and tie them together for business expansion or new venture.

16. Generally, poor people demand a small amount of loans and average loan size is used as a depth of outreach indicator in the existing literature. The smaller the size of average loan, the greater the depth of outreach.

17. bKash, established in 2011 as a joint venture between BRAC Bank Ltd. and Money in Motion LLC, USA, gained popularity in a very short period of time. The ultimate objective of bKash is to ensure access to a broad range of financial services for the people of Bangladesh. (For more information, see http://www.bkash.com/about/company-profile).

18. Food-for-work.

19. One House One Farm and Rural Savings Bank. For more details, please see, http://www.ebek-rdcd.gov.bd/.

20. The year-wise share of donations as part of the total loan outstanding were 3.02, 2.7, 3.82, 3.07, 2.54 and 2.19% in the year of 2009, 2010, 2011, 2012, 2013 and 2014 respectively. For more details, see MRA (2014) annual reports.