Consultation Meeting with the MFIs on: Diagnostics of Microenterprise (ME) Lending by MFIs in Bangladesh: Opportunities and Challenges and Way Forward
The Institute for Inclusive Finance and Development (InM) organised a consultation meeting with the microfinance institution (MFI) stakeholders on 20 January 2016 to solicit their views on opportunities and policy challenges of microenterprise lending. The representatives of 26 MFIs (3 very large, 9 large, 11 medium and 3 small) participated in the program. Dr. Mustafa K Mujeri, Executive Director, InM welcomed the participants and introduced the issues for discussion in the meeting. Professorme M. A. Baqui Khalily, Former Executive Director, InM explained the objectives of the meeting. Among others, Mr. Fazlul Kader, Deputy Managing Director, PKSF and Akond Md. Rafikul Islam, General Manager, PKSF were present in the meeting. The InM team presented the major issues of current practice of microenterprise lending by the MFIs.
One of the major issues raised during the discussion relates to the definition of microenterprises. There does not exist any universally accepted definition on which enterprise should be treated as a microenterprise by the MFIs. It emerged from the discussion that most MFIs consider the size of the loan in defining a microenterprise loan. Some MFIs consider a loan size between Tk. 70,000 and Tk. 1,000,000 as a microenterprise loan. Some others start from Tk. 50,000. It is also noted that the partner organisations (POs) of PKSF use the definition adopted by PKSF. Initially, PKSF used a loan size of Tk. 30,000- Tk. 200,000 for defining a microenterprise loan. In recent years, PKSF has introduced some changes and focus on the size of investment of the enterprise rather than the loan size. Now an enterprise is treated as a microenterprise which has a maximum asset value of Tk. 2,000,000 excluding land and building. The number of employees is also an important consideration. However, employment size depends critically on the capital intensity of the production process of the enterprises. Hence, while defining microenterprises, PKSF takes into consideration the number of full time employees and the scaling up possibilities of the enterprise. The loan size that PKSF now follows is between Tk. 50,000 and Tk. 1,000,000. The Grameen Bank focuses on age and capacity of the entrepreneurs while giving an enterprise loan and does not consider any particular loan size. The average loan size is around Tk. 500,000.
The MFIs face some constraints while financing the microenterprises. It is reported in the meeting that the default rate is higher in microenterprise lending relative to other lending activities of the MFIs. Also, as the loan size for microenterprises is bigger, even a small default rate causes a bigger impact on the balance sheet of the MFIs. On the other hand, profit margins are also higher in financing microenterprises. The demand for enterprise loan is also high. Hence, if the MFIs prefer to go for higher profits responding to the demand for micro-enterprise loans they might also face higher default rates. So there seem to exist trade-offs between making profits and minimising risks of lending. Some MFIs consider debt-equity ratios of the enterprises while others monitor cash inflows and outflows for minimising the risks. It is suggested that Credit Information Bureau (CIB) could be formed which can play useful role in providing relevant information on the borrowing status and repayment history of the entrepreneurs to minimise default rates. Scheme insurance and credit insurance may also be introduced.
Another constraint of funding the enterprises that the MFIs face is the difficulty in identifying the right kind of enterprises for lending. As such, selecting potential enterprises is a major challenge for many MFIs. The MFI staff have limited capacity in this respect. Also the entrepreneurs/borrowers do not have adequate accounting knowledge to provide all relevant information about the cash inflow/outflow of their business. In these respects, both borrowers and MFIs need capacity building training for their staff. Extensive training is needed to create a professional group among the staff of both MFIs and micro-enterprises such that right enterprises can be identified with capacity to administer the loans. The potential micro-enterprise borrowers need training on record keeping, modern accounting practices and effective loan administration in order to ensure productive use of loan.
In recent years, the MFIs are facing competition with banks in lending to microenterprises since many formal banks find it profitable to lend to micro-enterprises rather than holding unutilised funds. On the other hand, MFIs face significant funding constraints. The participants strongly suggest that appropriate policies may be adopted to facilitate the MFIs to raise funds from the deposit market which would enable them to remain competitive as well as meet the rising demand for loans of the micro-enterprises.