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https://dailyasianage.com/news/241826/competitiveness-of-microcredit

Published: 12:05 AM, 20 September 2020

Competitiveness of microcredit M S Siddiqui Microcredit programs in Bangladesh is well known throughout the world and it has been implemented by MFIs, state-owned commercial banks, private commercial banks, and specialized programs of some ministries of Bangladesh government. The programs are financed from savings collected from clients, cumulative surplus (profit), concessional loan received from sources such as The Palli Karma-Sahayak Foundation (PKSF), grants received from national and international donors and commercial bank borrowing. In some countries, where microcredit is believed to be developed but the interest rates on microloans have remained stubbornly high. For example, in Bangladesh, interest rates on loans were very high among the hundreds of microfinance institutions (MFIs). The effective interest rate was 40-45% and there was no sign of change in the interest rate for many years until intervention by PKSF. The foundation of modern microcredit is built on the belief that poor clients are so starved for credit that their main concern is access rather than interest rates. In many studies confirmed a prevailing view that price is a low priority for clients, relative to product-related factors (such as loan size) and service-related factors (such as time to disbursement or time spent at group meetings). There is an experience of group-based lending and the cost of leaving is very high but there is rising evidence of multiple borrowing from different MFI due to unhealthy competition or lack of market information. The experiences of the microcredit sector in some studies in other countries suggest that certain conditions need to be in place for a sustainable reduction in interest rates. These conditions apply to both the supply and demand sides of the market. There was a demand from civil societies for the reduction of the interest rate. The borrowers were reluctant to demand rather they were happy with a credit available to them. The initiative first came from PKSF. PKSF was holding a sizeable of Microcredit market. The market's lack the competitive price pressure is compensated by externally imposed caps from PKSF and pressure from political leadership. They first announced to fix the interest rate of a maximum of 27% for the borrowers financed by NGOs foundered PKSF. It advocated with the government and Microfinance Regulatory Authority also fix the interest rate cap for Microcredit. The Bangladesh case suggests that as access to microcredit broadens in a country, pressures on interest rates grow-if not from clients directly, then indirectly through regulators and policymakers. MFIs also get fewer funds from overseas donors and face completion from others. In addition to MFIs, commercial banks in Bangladesh are also engaged to offer micro-financial services. Given the countrywide branch network and availability of adequate funds, commercial banks have enormous scope to provide microfinance among the poor.

The microcredit sector should face market challenges with the entry of new NGOs offering lower interest rates and better service with innovative products. The experiences in Bangladesh suggest that it is not inevitable that price competition will emerge as markets develop-or at least, that it can be significantly delayed in market development. Competition is generally expected to benefit consumers (borrowers) by offering a wider choice of appropriate products ( microcredit plus) and providers (NGOs) become efficient with better service, and lower prices (interest rate and service charges). A competitive market is one in which, (i) on the demand side, consumers have an effective choice of providers and the ability to distinguish among them and, (ii) on the supply side, providers need to take into account other providers' behavior when deciding the terms and conditions of the products and services they offer. The credit providers place a lot of value on quality service, flexible product characteristics, and the availability of upgraded small loans or medium loans for more formal business. The service charges apart from interest and the methods of collection of loan is a determinant factor for the borrowers. The service charges are an instrument of MFI to hide the cost of funds which is very difficult for poor and illiterate borrowers. But the awareness of and sensitivity to interest rates is likely to increase over time as microfinance clients become more experienced, sophisticated borrowers-Likewise, interest rate sensitivity is likely to increase as clients become more literate and educated. The success of microfinance creates disciplined, better-of clients who are more attractive to a range of lenders. The emergence of these borrowers will likely increase client price sensitivity. When firms come to believe that clients will respond to price incentives, they are motivated toat least consider reducing rates. Demand-side factors tend to exert a pull toward greater interest rate competition over time. However, pricing competition alone does not mean that overall market interest rates will necessarily decline over time. This may not change due to interest rate cuts among a few small providers since the big MFIs has a market reputation and market penetration process, hence the effect of the cut of interest rate is very limited. As banks increasingly enter microcredit markets, MFIs will be forced to compete against well-established bank brands. MFIs soon will find that they need a sound branding strategy to face the challenge. They need to start investing now in building a strong brand. In order to reduce the interest rate and improve the service, the idea of "microcredit plus" came up with new products of health, education, housing, clean drinking water, social justice etc. The competition has been based mainly on particular features of the loan product and service and brand of MFIs. The donors are now concerned about completion within MFIs and also the welfare of borrowers since donors are interested in promoting pro-consumer microcredit. Donors are pressing their beneficiary MFIs to collect and disseminate credible market information, enhance consumer education and improve financial infrastructures, such as the development of credit bureaus, but also the training and support of financial regulators and competition authorities. They would like to see strong MFIs and fair competition and the maximum benefit of borrowers. The competition policy includes competitive locations-opening new branches in underserved areas, flexible product terms-making loan terms more flexible, for example, by allowing longer, larger loan amounts for first and subsequent medium and small loans. The credit includes microcredit plus products such as other loan types, such as remittance of expatriates, housing, or other financial services, such as savings or insurance-linked to the loan and improved service of reducing the time

for processing application and disbursement of the loan. The health insurance, health care service and other value-added services are adding further value to the microcredit program. PKSF was created in 1990 in Bangladesh. It intends to assist with microcredit funding and institutional capacity building for microfinance institutions (MFIs) and non-governmental organizations (NGOs) that provide microcredit loans to poor populations in the country. PKSF is a public-private organization that does not directly lend to clients but serves as an apex organization, providing funds to MFI's, building capacity, giving support and networking with international organizations and government. PKSF has helped many MFI's to move toward sustainability. It has also developed several policies and a quality system with a total of over 100 performance indicators (for the viability of borrowers and institutional viability) and ratings for each indicator. It also lobbies with the government for a good regulatory framework. In addition to the benefits to the consumer, fair competition in this sector enables more productive NGOs to survive and grow. PKSF has 273 partner NGOs till 2015 and number of branches 6968 and disbursed loan of USD 2635.04. It has a controlling presence in the microcredit sector and as a provider of finance and regulators are in a position to develop completion among NGOs. The newly established Competition Commission may also have a study and role to play to increase competition in the microcredit market. The writer is a legal economist Email: mssiddiqui2035@gmail.com