Ask a casual observer to describe microfinance, and most likely he or she will mention Bangladesh and tiny group-guaranteed loans for women. But on a recent trip to Bangladesh, I learned that the Bangladeshi microfinance sector has moved on. Way on.
The model of microfinance in Bangladesh, as it originated at Grameen Bank, involved tiny loans to women with fixed terms and amounts, group liability, weekly meetings, forced payments into a group savings account, and a set of 16 social pledges chanted each week while standing at attention. The Grameen model spawned imitators around the world, involving a large share of microfinance clients in India, the Philippines and East Africa, among other places.
But while many in the microfinance industry and outside it equate microfinance with the Grameen model, Grameen itself, as well as the other microfinance institutions in Bangladesh, have quietly re-engineered their models to pursue an expanded vision. The most dramatic shift occurred in 2002, with the introduction of Grameen II, a thorough re-tooling of Grameen Bank's operations. Throughout the past decade, most of the hundreds of microfinance institutions (MFIs) in Bangladesh have followed suit, experimenting with new lending methodologies, products and support services.
Loans to women? Many MFIs now serve men, too, though loans to women still dominate.
Forced group savings? Most MFIs now offer flexible, individual deposit services to their members. MFIs have become largely self-funded from deposits. (The sector has $2.6 billion in total loans, financed by $2.2 billion in total savings, according to the MIX, a microfinance data aggregator.) And unlike the original forced savings, savers can deposit and withdraw their money whenever they wish.
Pre-set loan amounts and terms? Borrowers can often select the length of loan they need, and loans are now available for small businesses (up to about $15,000). At the same time, many MFIs have developed loan and support programs for the "ultra poor."
These are all major departures from the original model. But perhaps the biggest change is the relaxation of formal group liability. Almost none of the Bangladeshi providers I spoke with still use group guarantees in their original form to reinforce loan contracts. They do use groups to facilitate interactions with clients, and may offer various incentives for peer support. However, formal guarantees and even, in some cases, weekly group meetings have disappeared.
These changes all make microfinance more valuable for clients, both in terms of better products and simpler delivery. They occurred as a result of learning and increased competition while the Bangladesh microfinance sector matured over two decades. Microfinance has grown to enormous scale in Bangladesh, with a reported approximate 23 million borrowers in a country of roughly 150 million people. These numbers reveal the highest population saturation of microfinance in any country. If the average household size is five people, the data would suggest that most households in the country have some link to microfinance. In fact, many families have access to multiple providers, enabling them to demand greater flexibility and client-responsiveness through competition. At the same time, the providers have learned how to manage risk more flexibly, rather than hewing to the original rigid formula of stepped loans, forced savings and zero delinquency tolerance. Market pressures, among other considerations, nudged lenders to drop unpopular provisions that were not essential for risk control. A similar process some years ago led to a massive shift from group to individual lending among many MFIs in Latin America.
Moreover, the MFIs in Bangladesh have continually sought to make a greater difference in clients' lives. This drive appears in the broader array of financial products -- savings, insurance, and specialized loans (including energy, education and housing loans, in addition to small business and ultrapoor loans). It appears in the offer of other development services (such as schools, training, or health services) or economic activities, often through sister companies, such as Grameen Phone. BRAC, with over 5 million microfinance clients, is a leader in development services: To note that BRAC operates over 32,000 primary schools is only to hint at its staggering programmatic range.
One of the interesting things about microfinance in Bangladesh is that its intense market saturation has not resulted in a crisis of over-indebtedness or unmanageable default. "Overlapping" is common -- that is, clients taking loans from several MFIs at the same time. Levels of multiple lending that would cause alarm in other countries are commonplace in Bangladesh. Many borrowers have three, five or even more loans outstanding at the same time. Providers say they are not worried about overlapping because it has been a feature of the sector for some time without triggering major bouts of default. They attribute the avoidance of crisis to the moderate pace of growth in microfinance over the past two decades, which has allowed clients and providers alike to learn by doing. In markets that have experienced crises, like India, Bolivia and Morocco, the crisis was preceded by a very rapid run-up in loan portfolios. Annual growth rates in the range of 20 to even 40 percent per year, as in Bangladesh, may be significantly safer than the 100 percent or higher rates experienced prior to crises in other countries. With extremely high growth, many clients are inexperienced and many loan officers are untested -- a dangerous combination.
Because it has been a sizable sector for two decades, Bangladesh presents the interesting case study of a country in which many new clients will have grown up with microfinance as the daughters (and sons) of clients. It would be interesting to examine whether clients who learned about microcredit at their mothers' knees make good debt management decisions. If that could be shown, it would provide powerful information to guide the current interest in financial literacy training.
Meanwhile, the providers in Bangladesh are rightly proud to be part of one of the oldest and largest microfinance sectors in the world. They are confident that their sector is stable even in the face of heavy saturation and multiple borrowing. And yet, I wonder about that. Pride goeth before a fall, says the proverb, and if there is one lesson from the history of financial crises, it is that no financial sector is immune.