Bangladesh has one of the oldest and most diverse microfinance sectors in the world, including some of the largest and most sophisticated microfinance institutions.10 The three largest MFIs, for example Grameen Bank, BRAC, and ASA ' served a combined membership of more than four million peoples of December 1996.11 In Bangladesh, the unique circumstances of no regulatory oversight and large, well-funded non-governmental organization (NGO) community have resulted in the ad hoc evolution of sophisticated and innovative MFIs seeking to alleviate poverty. Most MFIs in Bangladesh combine microcredit with a strong education and social-change agenda to address the structural poverty of rural landless individuals, so credit (and financial services) may be only part of their development activities.
Most MFIs in Bangladesh are NGOs, which are exempt from oversight by the central bank despite their ability to lend and collect deposits from members. According to the local trade association, 351 NGOs provide microfinance services, credit and savings, though the four largest NGOs represent about 80 percent of the total loans outstanding.12 This chapter focuses on those organizations for which microfinance is the sole or primary activity and that are striving for financial self-sufficiency.
At present, the only MFI in Bangladesh regulated by the central bank is the Grameen Bank, the country's largest micro lender. Grameen was organized under a special, one-time bank charter issued by the Ministry of Finance in 1983. Grameen has lent more than US$1.17 billion to about two millionmembers.13 Its innovation in peer group lending has become a local and global model for lending tithe asset-less persons.14 The Bangladesh Bank (the central bank) has traditionally viewed NGOs as distinct from other financial institutions because of their social and development missions. However, as MFIs continue to expand and solicit member savings to finance loans, the Bangladesh Bank must reconsider whether it needs some regulatory oversight to protect individual depositors and savers from fraud and mismanagement.
Bank regulation is conducted by the Bangladesh Bank and the Ministry of Finance. The Bank has the responsibility to establish regulations and supervise the banking sector. It has the power to license and examine all banks in the country and exerts great influence over the state-owned banks and their directors, in part due to its accountability to the Ministry of Finance. It has a staff of approximately six thousand and is headed by a governor appointed by the Ministry of Finance. The Ministry of Finance is a cabinet-level position within the government, and the Minister is a direct political appointee. Where the jurisdictions of the two agencies meet or overlap is unclear, but the Ministry of Finance is influential over the Bangladesh Bank
Bank Regulatory Framework and Supervision
Like most central banks, the Bangladesh Bank has the authority for both prudential (or preventive)regulation that aims to limit the risks undertaken by banks in their quest for profits and growth, and protective regulation that gives it the power to grant and revoke banking licenses and to assume control of a mismanaged financial institution. Bank regulatory reform has been underway since 1989to strengthen the effectiveness of the Bangladesh Bank's oversight of the formal financial sector and to bring supervision practices closer to international banking standards. In 1989, the Bangladesh Bank liberalized interest rates, ended government mandates on the allocation of credit to industrial sectors(although some interest rate subsidies remain for priority sectors such as agriculture), and introduced risk-classification systems for reporting delinquency and portfolio quality.18 In late 1994, regulatory reform continued as the Bank updated the risk-classification systems and permitted the licensing of private and foreign banks, and non-bank financial institutions.19
Since 1994, there have been no usury laws for banks or MFIs, and fewer restrictions on banks 'permitted business activities and pricing.20 Banks are required to submit an interest rate 'band' for their lending in the current period, but this can be adjusted monthly. Banks are not required to lend only to formally registered companies or to those which administer value-added taxes.
While the Bangladesh Bank's regulations require banks to report financial condition, portfolio quality, and earnings to the central bank on a regular basis, the reporting standards remain less stringent than international banking standards. For example, banks are only required to report as delinquent those loans unpaid after one year, and loans unpaid after two years are reported as bad debts. One thousand of the six thousand staff positions at the Bangladesh Bank are dedicated to examining the thirty-two national commercial banks. While the central bank has strengthened considerably, it continues to Regulators and Intermediaries
The Grameen Bank is regulated and supervised by the Ministry of Finance because of the bank's unique charter. The 1983 Ordinance exempts Grameen from regulation by the Bangladesh Bank, although the Ministry of Finance delegates some of its monitoring responsibilities for Grameen to the central bank (this is described in greater detail below).
Those NGOs large enough to receive foreign funding are overseen by the NGO Bureau, which must approve all foreign aid inflows. To receive foreign funds, the NGO must submit a work plan and a budget for the proposed project. However, the Bureau does not conduct any assessment, examination, or evaluation of the financial condition of the NGO or the financial viability of the project. Funders are responsible for completing their own risk assessment before funding an NGO, with no third party supervision or monitoring other than annual financial audits and periodic evaluations and assessments. One entity that will exert increasing influence over NGO microfinance institutions is the Palli KarmaSahayak Foundation (PKSF), a government-funded foundation created in 1990 to provide loans to NGOs engaged in microcredit. PKSF is becoming a more significant presence through its receipt of aUS$100 million World Bank loan in 1997 for lending to NGOs. While PKSF does not regulate MFIs it can influence the semi-formal sector by setting performance and reporting standards for its borrowers. One of its goals is to encourage professionalism and better management practices among microcredit organizations. PKSF lends money at 4 to 5 percent for three and four year terms, and currently funds more than 200 NGOs. The government appoints the board, and the board elects managing director. Address many challenges in the formal financial sector.
Finally, the Credit and Development Forum was established in 1996 as a trade association for microcredit NGOs, but has primarily served as an information clearing house thus far.
Existing Regulation: The Grameen Bank Charter
The only central bank-regulated MFI in Bangladesh today is the Grameen Bank. Grameen's formal and legal bank status allows it to raise capital and collect deposits to finance its commitment to provide banking services to low-income persons. In theory, this forms the basis for Grameen'spermanence as a banking institution. Grameen Bank evolved from an initiative sponsored by Chittagong University, to a project of the Bangladesh Bank, to a specially chartered institution in 1983with the passage of the Grameen Bank Ordinance by the Bangladesh Parliament..26 While Grameen does not attract private capital with market rates of return, and still receives substantial donor funding for its development activities, the Bank's operating costs are covered more than one hundred percent by internally generated revenues.
Regulation in the Grameen Bank Ordinance
The Grameen Bank Ordinance is a special charter adopted in 1983 that describes the formation of the institution, its management and governance structures, supervision by the Ministry of Finance, ownership structure, and functions. In effect, the ordinance serves as its articles of incorporation and major policies. Like a standard commercial bank charter, the Grameen Ordinance addresses licensing requirements to ensure a prudent structure for the bank and ongoing supervision, and monitoring requirements for banking operations. For banks, typical licensing and supervision requirements include:
' Restricted entry into banking through strict licensing procedures and minimum standards;
' Restrictions on permitted business activities and limitations on certain risks (e.g., credit and foreign exchange risks);
' Capital adequacy requirements for both minimum amount as a financial cushion and on risk adjusted gearing ratios that assess capital relative to risks undertaken;
' Limits on ownership by any one party;
' Liquidity and cash reserve requirements;
' Thorough information disclosure through periodic reporting to the central bank;
' Demonstrate need for banking services in a geographic service area; and
' 'Strict limits on insider and related lending that might put the bank at undue risk.
Supervision and Oversight
Although the Ministry of Finance technically supervises Grameen Bank, it has delegated the review of monthly reports and new branch requests to the central bank. While not specified in the Ordinance,Grameen's monthly reporting requirements to the Bangladesh Bank include the following information by regional office:
' Loans disbursed (for the month, cumulative, to men, and to women);
' Loans realized (repaid);
' Loans unpaid after one year (delinquent);
' Loans unpaid after two years (bad debt);
' Housing loans disbursed;
' Savings in the Group Fund (funds managed by Grameen on behalf of members);
' Loans extended from the Group Savings Fund;
' Number of members
No quarterly reports are required; Grameen submits a brief annual report with audited financial information. No ratio analysis or trend reporting on portfolio quality, and no cost or profitability information is required. Other than these reports, all oversight occurs through government participation on the board of directors and government ownership of stock. No on-site examinations
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