Handling Default Risks in Microfinance: The Case of Bangladesh

This paper highlights several instances of default risks in microfinance, and suggests ways to address them.

The risk management aspect of microfinance should not be overlooked in the enthusiasm to apply it as a poverty alleviation tool. This paper highlights several factors that lead to default risk in microfinance. These include weaknesses in the post-disbursement funds administration by MFIs, lender-side factors such as lack of technical assistance given to microfinance recipients and borrower-specific factors relating to moral hazard.

The paper contributes towards a more effective recovery process that will reduce possibility of default. In order to reduce default risk and maximize benefits of microfinance to creditors and borrowers, the paper suggests that MFIs:

• Have a monitoring system to ensure that funds are being spent as agreed;
• Directly purchase relevant equipment for the business project and limit the amount of cash disbursement;
• Appoint a central purchaser for business output and require that part of the sale proceeds goes towards paying MFI instalments and the balance goes to the recipients of credit.