Basic features of the Microcredit Regulatory Authority Act, 2006 The Act is the basic skeleton of regulatory requirements,

which has a scope to expand further by formulating rules. Following are the important areas which have been covered in the law; 1. formation of the Authority, 2. duties of the Authority, 3. prerequisites of license for MFIs, 4. rights and responsibilities of MFIs, 5. deposit insurance fund, 6. governance of MFIs, 7. reserve requirement, 8. profit distribution, 9. operational requirement, 10. illegal activities and punishment, etc. Vision The Microcredit Regulatory Authority (MRA) will create a conducive and healthy environment in the microfinance sector which will ultimately eradicate poverty and contribute to achieve Millennium Development Goals (MDG) as well as foster sustainable development of the country. Mission To uphold the vision and in pursuant with the Microcredit Regulatory Authority Act 2006, MRAs mission is to ensure transparency and accountability of microfinance operations of NGOMFIs as well as foster sustainable growth of this sector. In order to achieve its mission, MRA has set itself the task to attain the following goals: 1. To formulate as well as implementing the policies to ensure good governance and transparent financial systems of MFIs. 2. To conduct in-depth research on critical microfinance issues and provide policy inputs to the government consistent with the national strategy for poverty eradication. 3. To provide training of NGO-MFIs and linking them with the broader financial market to facilitate sustainable resources and efficient management. 4. To assist the government to build up an inclusive financial market for economic development of the country. 5. To identify the priority issues of microfinance sector for policy guidance and dissemination of information to attain the MRAs social responsibility. Responsibility of MRA According to the Act, the MRA will be responsible for the three primary functions that will need to be carried out, namely: 1. Licensing of MFIs with explicit legal powers;

2. Supervision of MFIs to ensure that they continue to comply with the licensing requirements; and 3. Enforcement of sanctions in the event of any MFI failing to meet the licensing and ongoing supervisory requirements.

Background In December 1997 the Bangladesh Bank commissioned a study to examine "the Regulatory Aspects of Microfinance Institutions (MFIs) and Linking it with the Formal Financial Sector". The study was completed in 1998 and the major findings and recommendations were as follows; 1. The regulation available in the form of statutory requirement under the existing banking and financial laws will not cater to the special needs of this sector, 2. Legal recognition of MFIs through enactment of law is required to access formal sources of funds, so that they can operate under an agreed "Code of norms/ Conducts" under the form of a special licensing arrangements, 3. Self-regulation based on agreed "Code of norms/ Conducts" can be an alternative or may supplement the existing or new government regulation, which may be introduced Subsequently in the light of the above recommendations Bangladesh Bank and other stakeholders also raised the issue of regulation for this sector to the government. In this circumstance, the government formed a Committee of seven members with the chairmanship of the Governor of Bangladesh Bank in October 1999 to a) recommend an effective credit and savings policy for this sector, b) ensure transparency and accountability into their activities and c) make some recommendations regarding a regulatory framework and to propose a body to regulate and supervise these institutions. The Committee submitted its report in March 2000, the major recommendations consist of formulating the following policies and actions; 1. Policy to remove overlapping problem, 2. Policy regarding establishment of linkage between NGOs and formal financial sector to solve NGOs' funding problem, 3. Policy for loan classification, provisioning, interest rate, reserve requirement against savings/ deposit, and investment of savings/ deposits, 4. Legal basis to recover default loan, 5. Proper definition of member and non-member, 6. Policy for uniform accounting standard, internal and external audit, 7. Fix up the upper limit of administrative expenses of NGOs, 8. Formulation of a prudential guideline for the microfinance sector,

9. Formulation of performance standard to monitor and rating NGO-MFIs, 10. Creation of a separate regulatory body or a subsidiary organization of On the basis of the above recommendations there was a meeting in Ministry of Finance on May 28, 2000 under the chairmanship of the then Finance Minister. According to the decision of that meeting a Unit namely "Microfinance Research and Reference Unit (MRRU)" was established in Bangladesh Bank under the supervision of a National Steering Committee formed through a government order on June 18, 2000. The Governor of the Bangladesh Bank headed this Committee and it consisted of 10 other members from, ministry of finance, social welfare ministry, NGO Affairs Bureau, PKSF, Grameen Bank, ADAB, BRAC, and others. Members were selected from both government and private sectors. Terms of References (TORs) of the Committee were as follows; 1. Formulation of policy guidelines to regulate the NGO-Micro-Finance Institutions (NGOMFIs) and setting performance standard to ensure their qualitative improvement. 2. Preparation of uniform accounting guidelines for MFIs to ensure their transparency and accountability. 3. Monitoring the activities of the MFIs in compliance of the policy guidelines prepare by the Steering Committee. 4. Recommendations for preparing a legal framework in support of the Micro-finance Research and Reference Unit or a new regulatory authority for the MFIs. The Steering Committee was given three years time to complete its work under the above TORs. Accordingly, by June 2003 the Committee completed following works with the help of a technical committee headed by the then, Managing Director of PKSF; 1. Prepared a financial guideline, TOR of external and internal auditor to ensure financial transparency and accountability, 2. Prepared a guideline to assess the performance of NGO-MFIs, 3. Prepared some formats for collecting information from NGO-MFIs for developing Management Information System that would help monitoring the activities of the MFIs. However, the Committee could not prepare a legal framework of a regulatory body to act as the regulatory authority for the micro-finance institutions (TOR (d) above) because of time constraint. The Committee submitted its report to the Government in June 2003; major recommendations were as follows: 1. MFIs should not be permitted to accept deposits from the non-member/ general public. 2. Steps should be taken for implementation of the guidelines, format, prepared by the Committee to ensure use of best practices by the MFIs. 3. The above steps should to be taken immediately, for which a regulatory body is necessary. Until such a legal regulatory authority is constituted the government may consider giving authority to this Committee/ the Unit to implement the recommended guidelines as an interim arrangement. 4. The Committee will prepare a legal framework for the regulatory body to act as a regulatory authority in the second term if the government permits.

5. The government may extend the time of the Committee for two more years to formulate a regulatory framework. The government accepted those recommendations and extended the time of the committee for two more years. Steps taken by the Steering Committee/ the Unit in the second term were as follows. 1. A separate office was established in Bangladesh Bank for the Unit to implement Committee's guidelines. Initial technical and financial supports in establishing a separate office were given by the Bangladesh Bank and the Palli Karma-Sahayak Foundation (PKSF). 2. A public notice was published on daily newspapers regarding prohibition of deposit collection from non-members without having formal licenses to do so. 3. Published an operational guideline on the basis of recommendations given the Steering Committee for monitoring management and financial system of microfinance institutions. It contains reporting formats, guideline for measuring performance and an accounting procedure as well as terms of reference for internal and external audit. 4. Based on that guideline MRRU requested NGO-MFIs to provide quarterly information since January 2004 to the Unit. The Unit has published two analytical reports on NGOMFIs in Bangladesh based on the information provided by the NGOs. 5. The Unit provided training to NGO-MFIs on the operational guideline. Proposal for Special Enactment for a Regulatory Authority The Steering Committee has prepared a draft law for setting up a separate regulatory authority for this sector and submitted it to the government for taking necessary action. Two renowned lawyers and a few microfinance specialists were involved in the process of drafting the law. Before submitting the final draft to the government, the Committee discussed the important contents of the draft with the representatives of NGO-MFIs in a workshop held in December 2004. A number of relevant recommendations from this workshop were taken into account during finalizing the draft law for a separate regulatory body. The draft law suggested for an independent regulatory authority that would be responsible for providing license to the MFIs and monitoring their activities. The new law passed by the Government The government passed the law, ' Microcredit Regulatory Authority Act 2006' in July 2006 on the basis of the suggestions given by the Committee. Under this law the government has established a separate Microcredit regulatory Authority (MRA) and constituted its board of directors with the governor of the Bangladesh Bank as the chairperson. According to this new law all active MFIs will have to apply for license from the Authority. No MFIs will be allowed to work within the country without having license from the Authority. According to the Law all institutions who have microcredit operation should separate their financial operations from other development works and keep their accounts separate. The Authority has been given power to monitor and supervise all these MFIs who will get license from it. The Authority also has the power to prepare detail rules related to the operations of microcredit including conditions for

spending any income, area of operations, guideline of internal and external audit and accounts, collection of deposits, and use of earned profit, governance structure of MFIs, reporting requirements etc. The Authority has the mandate to take punitive measures if any institution does not comply with any of the provisions of law and rules. Establishment of MRA To bring Non-government Microfinance Institutions (NGO-MFIs) under a regulatory framework, the government of Bangladesh enacted "Microcredit Regulatory Authority Act, 2006 " (Act no. 32 of 2006) on July 2006 with effective from August 27, 2006. Under this Act, the government established Microcredit Regulatory Authority (MRA) with a view to ensuring transparency and accountability of microcredit activities of the NGO-MFIs in the country. The Authority is empowered and responsible to implement the said act and to bring the microcredit sector of the country under a full-fledged regulatory framework.

NTRODUCTION Microcredit programs in Bangladesh is implemented by NGOs, Grameen Bank, state-owned commercial banks, private commercial banks, and specialized programs of some ministries of Bangladesh government. In the microfinance sector total loan outstanding is around TK 248 billion (including Grammen Bank TK 72 billion) and savings TK168 billion. The total clients of this sector is 35 million (including 8.4 million clients from Grameen Bank) that accelerates overall economic development process of the country. Credit services of this sector can be categorized into six broad groups: i) general microcredit for small-scale self employment based activities, ii) microenterprise loans, iii) loans for ultra poor, iv) agricultural loans, v) seasonal loans, and vi) loans for disaster management. Loan amounts up to BDT 50,000 are generally considered as microcredit; loans above this amount are considered as microenterprise loans.

LICENSING STATUS OF THE NGO-MFIS IN BANGLADESH The Microcredit Regulatory Authority (MRA), established by the government in August 2006, received applications from 4241 private institutions (NGO-MFIs). But, around 1000 applications of them were found to be very small organizations that had fewer than 1000 borrowers or less than the USD 58,000 in outstanding loans that is generally considered as the minimum initial operating portfolio of a single branched MFI to be sustainable. However, till August 2012 the MRA had approved licenses in favor of 651 NGOs. There are another 210 applications are under process for a final decision although they are mostly small organizations but with some potentiality to become viable in course of time. As of August 2012, 3380 applications have been rejected. Recently MRA has invited new applications for obtaining license to conduct microcredit activities.

STATE OF MICROCREDIT IN BANGLADESH In the backdrop of global double-dip recession and over-indebtedness crisis in microcredit sector in several countries, Bangladeshs microfinance sector shows strong resilience and continues to contribute towards enhancement of macroeconomic growth. Bangladesh

microfinance sector is mature now and its assets constitute around 3 percent of GDP in 2011. Total outstanding loan of this sector (only licensed MFIs) has increased by 20.0 percent from BDT 145.0 billion in June 2010 to BDT 173.8 billion in June, 2011 disbursed among 20.7 million poor people, helping them to be self-employed and accelerating overall economic development process of the country. The total savings has also increased by 23.25 percent to BDT 63.3 billion in June 2011 compared to previous year from 26.1 million clients, over 93 percent of them are women. TABLE-1: Basic Statistics of NGO-MFIs in Bangladesh (As of 30 June 2011) Particulars No of Branches No. of Employees No. of Clients (Million) Total borrowers (Million) June, 2008 15,077 98,896 23.45 17.79 June , 2009 419 16,851 107,175 24.85 18.89 143,134.03 50,610.04 June, 2010 516 17,252 109,597 25.28 19.21 145,022.66 51,362.93 June, 2011 576 18,066 111,828 26.08 20.65 1,73,797.60 63,304.44 No. of Licensed NGO-MFIs 293

Amount of Loan Outstanding (Tk. Million ) 134,680.96 Amount of Savings( Tk. Million) 47,386.19 Source: MRA-MIS Database-2011

Table 1 shows the overall trend of microfinance statistics in Bangladesh. This sector has created direct job opportunities for over 111,800 people; 80 percent of them are male and 20 percent are female. At the end of June 2011, the sector had outstanding loans of BDT 173.8 billion disbursed to 20.7 million borrowers, and had accumulated BDT 63.3 billion as savings from around 26.10 million clients over 93 percent of them are women through more than 18,000 branches, by 576 NGO-MFIs licensed by MRA. TABLE-2: Size-Wise Loan Outstanding and Savings Compositions (As of 30 June 2011) Total Loan Total % of Range of No of No of Outstanding % of Total No of Savings Categories Total Borrowers MFIs Borrower (BDT Outstanding Savers (BDT Savings Million) Million) Up to 1000 85 Very Small 63973 492.48 1566.68 2914.21 2987.90 0.28 0.90 1.68 1.72 11.48 87660 351054 566864 469938 192.20 741.81 1282.30 1128.09 0.30 1.17 2.03 1.78 10.64 1001-2000 177 244974 2001-6000 120 422745 600110000 Small 1000146 364848

103 2218532 19946.10

2861318 6738.03

50000 Medium Large Very Large 50001100000 1000011000000 23 19 1571226 13805.22 4600621 39483.64 11162371 92601.36 7.94 22.72 53.58 100 1875363 4713.86 7.45

5527971 14652.13 23.15 14274780 33856.028 53.51 26014948 63304.44 100

1000001Above 3

576 20649290 173797.60 Source: MRA 2011

Table 2 shows the market scenario of NGO-MFIs in Bangladesh. The top three MFIs contribute 54 percent of total loan outstanding as well as savings of the microfinance sector in Bangladesh. Two of the largest MFIs, viz., BRAC & ASA, are each serving over five million borrowers. There are a few more developing fast. On the other hand the smallest 428 NGO-MFIs have contributed only 4 percent of total loan outstanding and 5 percent of total savings. Institutional concentration ratio is highly skewed in favor of large MFIs: just 22 institutions are in control of 76 percent of the market share while three largest organizations have control of over 50 percent in terms of both clients and total financial portfolios. TABLE-3: Scenario of Micro Enterprise Loan Total Total Loan Number of Outstanding Borrowers % (Tk Million) % 249585 140496 4857 15008 8570 3029 3885 15552 8816 7310 457108 617706 1.30 0.73 0.03 0.08 0.04 0.02 0.02 0.08 0.05 0.04 2.37 3.21 19128.64 9194.57 187.45 1067.96 561.26 141.12 149.10 1155.40 621.12 663.40 32870.01 40059.84 11.27 5.42 0.11 0.63 0.33 0.08 0.09 0.68 0.37 0.39 19.37 23.60

NGO-MFIs BRAC ASA Buro Bangladesh

Jagoroni Chakra Foundation Padakkhep Manobik Unnayan Kandra RDRS Bangladesh Shakti Foundation Society for Social Service TMSS UDDIPAN Top 10 MFIs Total 576 MFIs Source: MRA 2011

Table 3 depicts the scenario of micro enterprise loan, i.e., loans above BDT 50,000, of different NGO-MFIs in Bangladesh. It is observed that micro enterprise loan outstanding is BDT 40

billion which is around 24 percent of total loan outstanding in which the top ten NGO-MFIs contributed around 19 percent. It also shows that BDT 40 billion is disbursed to around 6 lakh borrowers which are only 3 percent of total borrowers. The table expresses that only the top NGO-MFIs are capable to run micro enterprise loan. Selected Indicators of NGO-MFIs in Bangladesh It is observed from table 4 that savings per member has been increasing over the years. In 2006 savings per member was Tk. 1,207 which stands at Tk.2495 in 2011 an increase to more than double within the last five years. The loan outstanding per borrower also increased over the years and average growth rate of loan outstanding per borrower is around 17 percent in 2011 compared to the previous year. The loan outstanding per borrower has increased by more than 100 percent within the last five years. These two indicators, savings per member (average saving size) and outstanding loan per borrower (average loan size) increased over time perhaps due to the increase in the income level of the poor resulting in an increase in their need for higher amount of loans from the MFIs. The ratio between borrowers to clients (members) remained steady for the last few years, which is within 70 to 80 percent and the savings to outstanding loan ratio has also been stable from 2006 to 2011. Since the total number of branches of MFIs has increased at a much higher rate in 2011 compared to the previous year, the number of members and borrowers per branch has decreased. Substantial rate of increase in the sizes of loans per borrower and savings per member has resulted in a rise in the total loan outstanding and savings in the sector. Consequently outstanding loan and saving per branch has also increased. The loan outstanding amount per branch which was TK 8.42 million in 2010 has increased by 14.4 percent in 2011. TABLE-4: Selected Indicators of NGO-MFIs in Bangladesh Particulars June '06 June '07 June '08 June '09 1,332.66 1,448.36 1,735.52 5,048.38 5,614.55 6,188.01 81.6% 32.3% 1,484 1,817 7.49 2.42 81.2% 31.78% 1,496 1,843 8.4 2.67 78.9% 35.5% 1,036 1,312 6.41 2.28 June '10 June '11 2,097.83 2494.49 7,558.92 8807.69 78.0% 35.6% 1,115 1,429 8.42 2.99 78.8% 35.9% 1093.33 1387.87 9.63 3.46 Savings per member (Tk.) 1,207.34 Outstanding loan per borrower (Tk.) 4,377.11 Borrower to (member) ratio client 75.1%

Savings to Outstanding loan ratio 36.7% Borrower per Branch 1,413 Member per Branch 1,883 Outstanding loan per branch (Million Tk.) 6.19 Savings per Branch (Million Tk.) 2.27 Source: MRA-MIS-2011

Fund Composition of the Microfinance Sector in Bangladesh While the fund composition of NGO-MFIs is changing, total fund has increased over time. In 2010, the growth was 10.49 percent, which further increased to 20.6 percent in 2011. Total fund in this sector was Tk. 152.3 billion in 2010 which rose to Tk.183.6 billion in 2011. Palli Karma Shahayak Foundation (PKSF), the micro finance wholesale funding agency, provides a large portion of loan fund at a subsidized rate which has increased from Tk. 24.48 billion in 2010 to Tk. 31.76 billion in 2011. Savings from the clients and surplus income from microcredit operations appeared as two major sources of fund for NGO-MFIsand are the main strength for their future growth. The clients savings has increased from 31.11 percent to 34.46 percent in 2011- an indicator suggesting that MRA Rules have a positive impact on savings collections.

TABLE-5: Selected Indicators of NGO-MFIs in Bangladesh Jun-08 Source of Fund Clients' Savings Loan from PKSF (Million Tk.) 36,397.32 22,708.58 Jun-09 (Million (%) Tk.) (%) Jun-10 (Million Tk.) Jun-11 (Million (%) Tk.) (%)

29.66 40,526.91 29.73 47,436.35 31.15 63295.88 34.46 18.50 22,666.20 16.63 24,484.12 16.08 31767.84 17.30 23577.85 12.84 19.13 23,896.37 17.53 23,006.41 15.11 3.71 4,110.29 3.61 8,847.97 3.02 4,109.29 2.70 7008.37 3.82 4.21 25.39 36,261.74 26.60 42,339.27 27.80 50298.66 27.38 6.49 10,907.40 7.16 7727.32 152,282.84 100 136,309.48 100 183675.92 100.00

Loan from Commercial Banks 23,487.03 Donors' Fund Other Funds Total 4,549.07 4,435.49 Cumulative Surplus 31,170.02

122,747.51 100

Source: MRA-MIS-2011 It is observed that although the commercial banks are recently considered a potential source of fund of microfinance, their share of the total source of fund did not increase over the last three years. MRA has been putting in efforts to increase loans from commercial banks to the sector by introducing the banks to the NGO-MFIs. However, borrowing cost from commercial banks is very high due to high interest rate charged and inflation which discourages NGO-MFIs to avail this as a source of fund. Previously donor driven NGOs are now trying to rely more and more on local sources of fund with the decline in foreign funding, which stood at only 3.82 percent in June 2011 which is around 70 percent higher compared to previous year. Growth of Top NGO-MFIs in Bangladesh Figure 1 shows the growth of cumulative disbursement of loans of the top NGO-MFIs in Bangladesh over the last 5 years. The total disbursement of BRAC and ASA is BDT 1000 billion as of June 2011. Although their total disbursement is overwhelmingly high but growth rate has reduced over the last four years. The total disbursement of most of the MFIs has increased during the last four years but yearly growth rate did not increase except for Shakti Foundation for Disadvantaged Women (SFDW).

Fig. 1. Cumulative Loan Disbursement of the Top NGO-MFIs