Commercial Banks Involvement in Micro Finance: A Brave Effort to Help the Poor.

Severe poverty is the root cause of the instability of the government, terrorism, malnutrition, ignorance, illiteracy in the developing country. Not only the developing countries but also sometimes some of the developed countries are also facing some of these problems due to the inequality between the rich and poor. The poor people are becoming poorer day by day. The inequality in the society is also making this problem more epidemic. Micro finance may be the simplest but the  bravest way of financing to help the 1.3 billion poor people of the world. 

Micro finance is mostly provided by the NGO’s, Government’s specialized institutions, specialized banks, Government’s sponsored micro finance projects in the developing nations. Micro finance activity mostly depends on foreign help and grants. But the commercial bank's involvement in micro finance is negligible and very poor. But why the most sophisticated and large institutions of the money market involvement in such finance are very low?  

Commercial banks are historically not inclined to provide loans to the poor and grassroots people of the society. But commercial bank’s involvement in micro finance is very important for fighting vicious poverty in the country. The stumbling blocks which resist the poor and marginalized people access to the banking and financial systems are: 

1.        Very high cost of financing
2.        High cost of processing
3.        Systems of collateral based finance system
4.        Concentration of commercial banks and financial institutions  in the urban area.
5.        High rate of interest
6.        Bankers negative perception about this kind of financing.
7.        Low recovery rate of the micro finance
8.        Rigid financing methodology  

In general, government commercial bank and some specialized bank practice micro financing activity in Bangladesh. Private commercial bank’s activity is very negligible in direct micro financing intervention, but they have strong influence on the stream of financing towards the micro finance institution.

The activities of the banking sector in the microfinance activity are a very important concept for the economy of the Bangladesh.  Most of the people of our country are poor and helpless.  The traditional bank does not allow them to take a loan because of the collateral based loan mechanism. So traditional microfinance institutions are specialized in micro finance business have come a long way in this sector. These NGO’s and MFI’s is the main player in the micro finance industry and may be they will remain the same for their no collateral based loan system and exotic loan recovery system. But the exorbitant interest charged by these institutions and their unstructured nature paved the way for the traditional banks to involved in the microfinance industry. Now the commercial banks and government controlled banks and also other specialized banks are playing an important role in this sector.  These institutions are now involved in varied microfinance activities in Bangladesh.

While a commercial bank is a financial institution that offers a broad range of deposit accounts, including checking, savings, and time deposits, and extends loans to individuals and businesses. The decision as to whether the commercial banks be involved in microfinance is a sensitive and debatable issue which requires a deep analysis of many factors. Primarily, the microfinance customers are large in number, scattered in far-flung areas with very minute transaction sizes. Only government or state bank alone cannot reach out to millions of potential Microfinance beneficiaries; a whole well knitted network with almost doorstep reach is required, which is only possible when the commercial banks will be involved in microfinance. In Pakistan it is estimated that as many as 5.6 million households need microfinance services but these services reach only to less than 1 percent, most probably because of the absence of commercial banks from the microfinance sector.

The most effective way for governments to encourage commercial banks to become involved in microfinance is to ensure an appropriate regulatory and prudential framework. The elements of an optimal policy context are:

Ø  Sound macroeconomic policies and basic infrastructure to ensure a growing economy (especially increasing complexity in the financial sector)

Ø  Minimal restrictions to profitable lending, particularly no interest rate cap's enhanced ability to establish a small commercial bank which can focus on this sector (such as a low minimum capital requirement)

Ø  Appropriate prudential regulations for this market including capital adequacy ratios, asset quality indicators and unsecured loan limits.

Ø  Create a small specialized bank or a separate microfinance unit within a large commercial bank.

Ø  Treat savings as equally important to lending.

Ø  Charge interest rates to cover all the costs of the lending products.

Ø  Ensure excellent MIS and portfolio management.

Ø  Recruit staff from outside the bank and/or give staff specialist training. Find a champion or visionary who will see the program through to success. 

The present commercial banking system is not so happy to provide investment in the micro credit sector as its risk exposure is high and the potential default rate is also higher if the policies and strategies are not taken accurately.  But if the banking trust the micro financing activity and maintain positive attitudes toward it, the situation and the microfinance sector will rapidly change.  A very conspicuous change in this sector is the information gap and the limitation of potential clients. Nowadays commercial banks are changing their attitudes toward this sector.  More and more banking institutions are trying to maintain positive attitudes and are merging with microfinance institutions, they are providing loan towards the root level clients.  This is a positive change in this sector.