Why does the Bangladesh microfinance sector need a Credit Information Bureau?
Rabeya Yasmin manages the Microfinance Credit Information Bureau (MF-CIB) component of the Business Finance for the Poor in Bangladesh programme. In this blog post, she outlines the work that our team is doing to help the Microcredit Regulatory Authority to establish the Bureau.
The microfinance sector of Bangladesh is incredibly vibrant, and it is the largest in the world. From its beginnings in the seventies, it has attempted to address the needs of the poor, vulnerable, and to some extent, the poorest, providing them with access to finance when traditional financing opportunities are out of reach.
I have had the opportunity to work in microfinance for the last 25 years, and what I have seen as an insider is a clear need for helpful guiding regulations. In 2006, we saw the establishment of the Microcredit Regulatory Authority (MRA), which started fully functioning in 2010 and which brought some rigour and discipline across the field.
There was of course existing structure and discipline among larger microfinance players such as Grameen, Asha, and BRAC, which have managed very structured and successful operations for many years. Many smaller and medium-sized actors do also operate with good structures, but when you look at the entire industry as a whole, there is a clear need and opportunity to assist the industry become more effective and efficient. That is what the MRA has been attempting to accomplish since it became functional in 2010.
Why a credit information bureau for microfinance?
In countries worldwide, banks generally have access to a credit information bureau that provides information to help them assess credit worthiness of their potential borrowers. Credit worthiness is represented as a score based on a potential borrowers’ ability to repay a debt, employment status, and other related factors. Microfinance sectors need this, too.
Improved credit histories can:
enhance credit worthiness of microfinance borrowers
improve loan portfolio quality of microfinance institutions
create the condition for graduation of small businesses from the microfinance sub-sector to the commercial bank/non-bank sub-sector
create opportunities for the microfinance sector to secure additional capital from investors and wholesalers to expanding the size and volume of lending to small businesses
In the case of Bangladesh, the microfinance sector is vast, with thousands of operating actors. It needs a credit information bureau that can help to assess the creditworthiness of borrowers and also create the enabling environment for borrowers to access a wider range of financial services. For over a decade, our microfinance sector has been wanting an MF-CIB.
There will be other benefits, too. While credit worthiness will be its primary role, the MF-CIB will also play a vital research role. For instance, if a microfinance institution wants to develop new products and introduce new innovations into the sector, it can gather existing information from the bureau. It can also depend on the bureau to conduct new research studies and generate new knowledge.
The MF-CIB will also be instrumental in adding an accurate, informed understanding of what is happening in the microfinance sector. Microfinance, like other sectors, does face criticism, so the bureau will play a key role in helping the sector to communicate authentic, verified information about the industry, and helping to address the genuine challenges that do exist. This will have positive implications not just for the microfinance sector, but the finance sector as a whole.
How the BFP-B is now supporting establishment of the MF-CIB
The prospect of an MF-CIB has been on the table for a few years, going back to 2003. Around that time, some industry experts were involved in the planning processes, and eventually, the UK Department for International Development became interested to support the establishment process. There was some very valuable groundwork conducted through DFID’s Promoting Financial Services for Poverty Reduction (PROSPER) in Bangladesh.
Now, following positive discussions among government, the Bangladesh Bank, Microcredit Regulatory Authority, and DFID, the BFP-B programme is helping the Microcredit Regulatory Authority to establish a functioning Microfinance Credit Information Bureau. The bureau will generate credit reports for microfinance borrowers, at least 30% of which are classified as small businesses.
Bangladesh Bank CIB will provide technical assistance to design the software. We are assisting the Microfinance Regulatory Authority with the Business Requirement Design, establishing a data management center, and building capability among the Microfinance Regulatory Authority and participating microfinance institutions to effectively manage the MF-CIB requirements.
By 2020, we expect an additional £58.88m to be made available for financing to small businesses as a result of enhancements in the credit worthiness of small business.
A Microfinance Credit Information Bureau is not a new invention. Similar institutions have already been established in other countries in Asia, Africa and South America. But to see a Microfinance Credit Information Bureau here in Bangladesh is important because we are dealing with such a large test case. Bangladesh has the largest microfinance operation in the world! If we can establish a well-functioning bureau here, this will create a very significant example and will send a powerful message to the global microfinance sector.
For more information, visit the Microfinance Credit Information Bureau page on our website -> https://www.bfp-b.org/mf-cib