The missing middle MSEs: The Financing Gap

In Bangladesh, financial exclusion is widespread. According to the World Bank’s Global Findex database, only 50% of Bangladeshi individuals above the age of 25 have a bank account and only 13% borrow from a formal financial institution. Emphasis placed on financial inclusion by the United Nations has motivated many developing countries in Asia to facilitate and develop their microfinance sectors. Bangladesh, Pakistan, and India are known to have large, inclusive, and vibrant microfinance sectors. In Bangladesh, loan amounts up to Tk. 50,000 ($637) are usually considered as microcredit by Microcredit Regulatory Authority (MRA), and loans more than this amount are considered microenterprise loans. Both types of loans may be provided by microfinance providers.

Although the lowest ceiling of ME loan is BDT 50,000 set by Bangladesh Bank, the average size of ME loan disbursed by Banks is BDT 680,643 (Bangladesh Bank Category wise Quarterly CMSME loan Disbursement Statement, January 2018 to September 2018). The gap between the lowest ceiling and average size of the loan is due to several reasons like banks do not have the requisite information and systems in place to quantify risk and differentiate between SMEs. Moreover, banks need more organized and granular information of the MSE to understand its business and creditworthiness but most of the MSEs have lacked in terms of this information. Another factor is the issue of moral hazard, wherein SMEs are perceived to take higher risks than larger companies with funds borrowed from banks.

MRA defines MEs on the basis of loan size. Any microloan of more than Tk. 50,000 is termed as micro-enterprise loans. Usually, ME loans are considered for those ‘graduates’ from microfinance programme who want a higher amount of loans to run their own informal businesses for which traditional microfinance does not have provisions. Although there is no general consensus about the upper limit of the loan, however, it can reach up to Tk. 1,000,000. The average size of ME loan disbursed by MFIs is BDT 135,577 (according to the data of MRA publication, NGO-MFIs in Bangladesh 2016). The main reason behind this is that there is no standard definition of ME loan for MFI which needs to be revised. Moreover, the high cost of funds from commercial sources also hampering the growth of the ME loan portfolio for MFIs.

As most of the ME loan borrowers are graduating from micro-credit and eventually they grow more and now in a place where their financials need are not fulfilling by both Banks and MFIs. As mentioned above, the average size of the Bank ME loan is BDT 680,643 and the average size of ME loan provided by MFI is BDT 135,577. The MSEs who need loans between Tk. 200,000 to Tk.600,000 are addressed neither by MFIs nor by banks and these MSEs fall under the ‘missing middle’ category. To address the ‘missing middle’ MFIs need to upscale and banks need to downscale their ME lending. The study conducted by BFP-B ‘Diagnostics of Micro-enterprise Lending by MFIs in Bangladesh: Opportunities and Challenges’; estimates that total demand for ME loans in 2015 was Tk. 737 billion. Total ME loan outstanding by MFIs was Tk. 123.27 billion and that of banks was Tk. 176.65 billion. So, the total loan supply to MEs was Tk.299.92 billion and therefore the demand-supply gap was Tk. 437.39 billion in 2015. The demand-supply gaps exist because MFIs are unable to upscale and increase ME lending because of MRA Rules and banks are unable to downscale and increase ME lending because of inadequate outreach and human resources in the rural areas.

MEs loan requirement from the banks and financial institutions is contradictory by characteristics – one is MEs’ requirement for the loan is considered too high compared to traditional microcredit offered by the MFIs; secondly, MEs’ loan demand is too small for the conventional banks and financial institutions which requires collateral and referral. MFIs can play a pivotal role in supporting MEs in rural areas. Though scaling-up microcredit to support growing MEs with diversified loan package has not been forthcoming as expected. However, under the current policy framework, MFIs are still the major collateral and referral free loan providers to MEs. In this backdrop, MFIs are also facing multiple difficulties in providing loans to MEs because of the definition of ME loans by MRA, and restriction on saving mobilization and ME loan outstanding by MRA. In addition to this, the absence of comprehensive and harmonized policy guidelines, legal framework, and ecosystem building among regulators restricts MFIs to support progressive MEs. 

According to MRA Rules 2010, the ME loan outstanding of a MFI cannot exit more than 50 percent of the total microcredit loan outstanding of that MFI. The MFI especially the top 10 are unable to increase their ME loan portfolio because of MRA restriction. Moreover, MFIs are unable to mobilize deposits from their members through voluntary and term deposit products because of MRA restriction on savings mobilization.

Note: This is a gist of the article I co-written with Former Senior Secretary, FID, Md Eunusur Rahman for BFP-B.

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