The World Bank has completed a study on rural banking and microfinance, with the help of the Government of Bangladesh and the United Kingdom’s Department for International Development. Business & Finance Consulting (BFC), a consulting firm with focuses on Eastern Europe and Central Asia, was hired to provide an analysis of the Bangladeshi rural market for microfinance. Titled the “Access to Rural Finance” project, the study examined commercial banks and microfinance institutions (MFIs) practicing in the rural areas of Bangladesh, including the state agricultural banks Bangladesh Krishi Bank (BKB) and Rajshahi Krishi Unnayan Bank (RAKUB).
The project concluded with many findings supporting the thesis that there are, according to WB, “constraints to access to rural finance” (see “Rural finance”). The study reports that for every unit of currency received by banks from rural clients, only half is lent back to rural regions. Microfinance has been unable to solve for this problem, says WB, as “only limited [microfinance] products [have] targeted” small enterprises and small and medium farms.
The BKB and RAKUB provide some financial services to rural areas, however their impact is hindered by, according to the study, “very weak financial performance.” WB and the Bangladesh Bank (BB), the nation’s central bank, conducted a review of the study upon its completion. During the discussion, the BKB and RAKUB were depicted as some of Bangladesh’s “most corrupt” banks with extensive losses and “non-performing loans.”
Commercial banks fail to serve in rural regions. The reason why is, according to WB, “partly because they have a limited branch network and partly because their products and procedures are not customer-friendly and are not suitable for low value transactions.”
In an effort to increase microfinance to rural micro and small enterprises (MSEs), WB proposes that BKB and RAKUB run commercially, while remaining under state ownership. WB, DFID, and the Japan Bank for International Cooperation (JBIC), a government-run bank founded in 1999 by the Export-Import Bank of Japan, have all pledged to fund the reforming of the two banks.
According to WB, reforming the BKB and RAKUB would include the merging and reconstitution of their boards. Additionally, the banks’ book keeping would be analyzed according to International Auditing Standards in order to determine financial losses. It is also proposed that the banks would develop rural loan waivers for humanitarian needs or disaster relief. The waivers would be financed by government subsidies. WB reports that the two banks represent 60 percent of Bangladeshi rural lending volume.
WB is also working with the Palli Karma Sahayak Foundation (PKSF), a state-run non-profit that has provided USD 181 million for microfinance since 1990, to create a computerized system for microfinance to help the microfinance sector expand the volume of their loans to MSEs. The project will also assist MFIs and insurance companies to construct an “index based weather insurance product” (see The Daily Star), in order to provide weather insurance to rural MSEs and small farmers.
By Quentin Ruiz-Esparza, MicroCapital.org Writer