Case Study Bangladesh: Financial Linkages in Bangladesh

This paper explores MFI bank credit linkages in Bangladesh. It states that:

• Inadequate funds prevent MFIs from reaching a large number of their potential clientele in Bangladesh;
• Existing clients, who want to expand their businesses, require larger loans;
• Formal financial institutions have excess liquidity, but find providing services directly to microcredit clients is a non-viable proposition;
• In such a situation, linkages between MFIs with financial constraints, and banks with excess liquidity, are a simple and effective solution.

The paper studies poverty in Bangladesh, looking at:

• Alternative sources of financing for the poor;
• Wholesale finance to NGO-MFIs;
• Performance of commercial banks - MFIs linkage wholesale funding.

The paper states that:

• Banks and MFIs can benefit from each others comparative advantages by establishing linkages;
• The bank-MFI linkage program aims to:
  • Provide performance-based credit support to qualified MFIs for on-lending to their clients;
  • Complement the Government's efforts for poverty-reduction;
  • Develop effective and mutually beneficial business-partnerships with NGO-MFIs free of collateral.

The paper describes in detail the work of the Credit and Development Forum (CDF), Bangladesh's central microfinance networking organization, that provides support to the MFI-NGOs.

It concludes that bank-MFI credit linkages benefit:

• Banks, in terms of profitability and business expansion;
• MFIs, in terms of sustainability, outreach and providing larger loan amounts;
• Borrowers in their socio-economic development.