Aslam

Business History
2019, VoL. 61, no. 4, 703–733

https://doi.org/10.1080/00076791.2017.1413096
History of microfinance in Bangladesh: A life cycle theory

approach
Md Aslam Miaa,b , Hwok-Aun Leec , VGR Chandrana , Rajah Rasiaha and
Mahfuzur Rahmand,b
a
Department of Development Studies, Faculty of Economics and Administration, University of Malaya,
Kuala Lumpur, Malaysia; bThe Centre for Poverty and Development Studies, Faculty of Economics and
Administration, University of Malaya, Kuala Lumpur, Malaysia; cISEAS Yusuf Ishak Institute, Singapore 119614,
Singapore; dDepartment of Banking and Finance, Faculty of Business and Accountancy, University of Malaya,
Kuala Lumpur, Malaysia
ABSTRACT KEYWORDS
This study aims to conceptualise and document the historical Microcredit and
evolution of microfinance in Bangladesh using the life cycle theory microfinance; microfinance
(LCT). Based on the LCT nomenclature, the microfinance sector institutions; multiple
in Bangladesh shows characteristics broadly consistent with the borrowing; life cycle theory;
Bangladesh
saturation phase (2006–2015) – which potentially has adverse impacts
on both microfinance clients and institutions. The maturity phase
(1996–2005) of microfinance has corresponded with competition
and several innovations (financial and non-financial). However,
the saturation phase sees increasing presence of uncoordinated
microfinance institutions and expansion of multiple borrowing,
as well as commercialisation and ‘mission drift’, which constitute
important challenges for the regulatory authority and management
of microfinance institutions.
1. Introduction
Formal and informal financial institutions targeted at providing services to the masses have
evolved significantly over the years. However, most formal financial instruments are prof-
it-driven. It is for this reason that they tend to neglect the poorest segment of society who
have little means of meeting their collateral requirements. Informal instruments, such as
borrowing from friends, family members and neighbours are quite common. Both formal
and informal moneylending exist, but the poor are either discouraged by exorbitant interest
rates or often become victims of such high and poorly regulated rates. Also, the absence of
commercial banks in the rural areas of poor countries leaves the poor vulnerable to the
activities of lightly regulated moneylenders. In light of these shortcomings, microcredit
became a major breakthrough. Developed by Professor Muhammad Yunus in 1976, micro-
credit offers the poor in Bangladesh a vital means to access credit. The success of microcredit
CONTACT Md Aslam Mia mdaslam.mia@siswa.um.edu.my

© 2017 Informa UK Limited, trading as Taylor & Francis Group
704 M. A. MIA ET AL.
in meeting the welfare needs of the poor has since resulted in it spreading to over a hundred
countries with an estimated coverage of 205.3 million clients (Maes & Reed, 2012).
Little is known about when microcredit was started, but its documented history can be
traced back several centuries to when an Irishman, Jonathan Swift, created the Irish Loan
Fund in the 1720s to provide financial services to unbanked populations with the hope of
developing rural areas of Ireland (Hollis & Sweetman, 2001). Microfinance also has origins
in India, Indonesia, Nigeria, Pakistan and some developed countries (e.g. Germany). Morduch
(1999a) claimed that modern microfinance has its roots in Europe. In line with this argument,
an earlier revolution of microfinance in Germany could be traced back to over 200 years ago
when an informal self-help movement started in Hamburg (Seibel, 2003a). In Africa and
Nigeria, microfinance originated in the sixteenth century as a system of rotating savings and
credit institutions named ‘ajo’ and ‘esusu’ (Awojobi, 2014; Seibel, 2003b). In Indonesia, the
Bank Credit Desa system (a sister institution to Bank Rakyat Indonesia) provided small-scale
loans to the rural poor without collateral (Kabir Hasan, 2002).1 Overall, it is well understood
that for centuries, many societies have developed informal lending systems that are based
on trust, are peer-based and without physical collateral (Kabir Hasan, 2002). Microfinance
and other related schemes, such as cooperatives and credit unions, subsequently evolved
to shape today’s modern microfinance instruments, after centuries of learning from trial and
error, failure and success (Seibel, 2003a).
Despite those microfinance movement in many countries, microfinance from Bangladesh
gained popularity around the globe. Microcredit grew spectacularly from its inception in
the mid-1970s, but changes in market structure and operational dynamics since 2000, such
as competition, innovation, product diversification, high market penetration and cost effi-
ciency, have transformed the mix of services rendered in Bangladesh. Despite its initial aim
to provide credit only to the unbanked and socially disadvantaged people, demand for other
financial services, such as savings, micro-insurance and remittances, changed the industry
so much that it is not very different from conventional banking. In addition, rapid techno-
logical change has also transformed a once traditional labour-intensive industry to a modern
industry providing financial services through mobile banking and electronic transmissions
(Gómez-Barroso & Marbán-Flores, 2014; Kumar & McKay, 2010). Moreover, the microfinance
institutions (MFIs) have expanded their scope of activity to include the advocacy of ‘sustain-
able development’ through the promotion of environment-friendly activities, which is known
as the third bottom line (Allet, 2012).2 Among them, ‘Green Microfinance’ and ‘Microfinance
Plus’ are two important features that have been targeted to cater to clients located in both
rural and urban areas.
The proliferation of microcredit among the developing economies since the spread of
the Grameen Bank (GB)3 model internationally as a viable financial instrument to alleviate
and the subsequent impasse it faced in Bangladesh presented a mystery that development
economists and economic historians have attempted to unravel. With the exception of Hollis
and Sweetman (2001), few works have examined the economic efficacy of the microfinance
industry in sufficient detail. Hollis and Sweetman (2001) analysed the life cycle of the ‘Irish
Loan Fund’ longitudinally over 200 years and pointed to agency problem as the prime cause
of its eventual decline. Meanwhile, using a broad and historical approach Di Martino and
Sarsour (2012) found macroeconomic instability, high interest rates and attributes of
borrowers as the main determinants of sluggish growth in 1995–2008 of the microfinance
industry in Palestine.
BusInEss HIsTory 705
Therefore, the aim of this article is to document historically the development of microfi-
nance in Bangladesh by drawing on the evolutionary perspective advanced by life cycle
theory (LCT).4 Developed by Vernon (1966),5 the LCT offers a useful framework for investi-
gating phases of growth, change and possible decline of particular firms and industries.
Based on the author’s knowledge, the LCT has not been previously deployed in the microf-
inance industry to understand its evolution. Deploying the LCT approach to evaluate the
evolution of microcredit over 40 years, as proposed by Di Martino and Sarsour (2012), will
help us fill some gaps in our understanding of the history of microfinance in at least two
ways. Firstly, the approach can help us understand issues and challenges, and strategic
responses by MFIs during each development phase. For example, in Bangladesh, the indus-
try’s most mature market has certainly grown and developed immensely. However, recent
trends indicate possible saturation and departure from microfinance’s original mandate.
Secondly, the peculiar characteristics of microcredit – spectacular growth, innovations and
convergence of technology in operation, followed by ‘commercialisation’ and ‘mission drift’
– enrich our knowledge of MFI practices based on the LCT framework.6 Therefore it could
provide insights on operational dynamics of microfinance.
The rest of the article is organised as follows. Section 2 explains the concept of microcredit
and establishes its differences and similarities with microfinance. Section 3 discusses the
conceptual framework. The historical evolution of microfinance in Bangladesh is documented
in Section 4, including innovations, issues and challenges faced by the microfinance sector
over the last 40 years. Section 5 concludes with summarising the findings and some direc-
tions for future research.
2. Overview of microfinance
2.1. Microcredit and microfinance
Microfinance is often equated with microcredit, but the two need to be distinguished.
Microcredit is a subset of microfinance with a longer history than microfinance. The term
microcredit is basically a combination of two words: micro and credit. Micro is a unit of meas-
urement in the metric system denoting a factor of 10−6, a millionth. The word ‘micro’ is derived
from the Greek word ‘mikros’, which means ‘small’, and ‘credit’ is derived from the Latin word
‘credere’, means ‘to believe’ or ‘to trust’. Combined, ‘microcredit’ essentially refers to the trust
between two parties in a small lending framework (borrower and lender). In general, micro-
credit often refers to the provision of small loans to impoverished groups of people for
self-employment to foster entrepreneurship, particularly targeted to unbanked women due
to the stringent requirements and conservative practices of the formal financial sector.7
Various financial schemes around the world bear resemblance to microcredit, although the
Bangladesh experience popularised the practice worldwide. For example, ‘Susus’ in Ghana,
‘Chit Fund’ in India, ‘Tandas’ in Mexico, ‘Arisan’ in Indonesia, ‘Cheetu’ in Sri Lanka, ‘Tontines’ in
West Africa, and ‘Pasanku’ in Bolivia display similarities and have been operating for several
decades (CGAP, 2006).
Microfinance has wider coverage than microcredit. Whereas microcredit is limited to credit
services, microfinance covers microcredit, as well as micro-insurance, savings, remittances
and other financial products. Amid the heterogeneity, the defining features of microfinance,
as explained by Srinivias (2015), include: small loans; tiny savings; micro-insurance; smaller
frequency of loans; shorter repayment periods; and operations at the local and community
level. Ledgerwood (1998) explains succinctly the distinctive feature of microfinance, which
consists of financial intermediation and social intermediation. Qudrat-I Elahi and Rahman
(2006) define social intermediation as organising and raising the voice of the poor to address
their aspirations and concerns over policies and issues related to their development. Financial
intermediation means match-making between savers and borrowers.
Usage of the terms microcredit and microfinance should be aligned with their scope, with
the former being a subset of the latter. Jain and Moore (2003) prefer to use microcredit
instead of microfinance, claiming that most MFIs have not developed large deposit mobili-
sation systems yet. However, their conclusion may have to be revisited in the current context,
as most MFIs currently offer banking services comparable to those of the commercial banking
system. For example, in the case of the Bangladesh microfinance industry, the total savings
of registered NGO-MFIs had reached US$1.69 billion in 2015, which represents more than
37% of the total value of loans outstanding (US$4.52 billion) (MRA, 2015). Functionally, almost
all MFIs in Bangladesh simultaneously provide credit, savings and other financial services to
their clients. Moreover, commercial banks, non-bank financial institutions and credit-coop-
eratives, who offer the full range of financial services, have also entered the microfinance
sphere (Mia, 2016). Thus, we prefer to use the term ‘microfinance’ over ‘microcredit’. Table 1
presents a summary of financial products currently offered by MFIs in Bangladesh.
2.2. Microfinance: distinctions and shortcoming

While MFIs have evolved to offer a wide array of products and services, their original role – to
help the poor by financing small scale entrepreneurial activities – remains central to the
premise and ethos of their operations. Dunford (2012) notes that the classical concept behind
microfinance is related to change – a change in the financial system where the emphasis
falls on the poor, who are excluded by the mainstream financial sector. However, microfi-
nance programmes do not treat the poor as hopeless victims who should be helped with
charity, or as commercial victims of a rapacious financial sector (Nasrin, Baskaran, & Rasiah,
2017). Rather, microfinance programmes promote the poor as normal human beings with
an innate right to accumulate wealth from the resources of our planet (Hickel, 2015). The
programmes and services offered by MFIs can be considered as vital ingredients for the
Table 1. Summary of financial products offered by MFIs.

Credit Savings Insurance Others
Term loan Compulsory saving Health Mobile subscription
Entrepreneurs loan Flexible savings Life Mobile financial services
Housing loan Daily savings Property Inward remittance services
Health and sanitation Voluntary savings Credit Micro-leasing
Seasonal Time deposit Crop Asset transfer (e.g. cow, goat, sheep, etc.)
Education Fixed deposit Others
Disaster Risk fund
Consumption
Loan top-up
Mid-term loan
Emergency loan
Migration loan
Islamic microfinance
Source: Adapted and modified from Mia (2016).
development of a country as the formal financial sector rarely meets the credit and other
associated non-financial demands of the poor.
As it is impossible for the poor to access loans from commercial banks without collateral,
microfinance plays a bridging function between the unbanked and the financial system.
However, the microfinance approach of Muhammad Yunus enables borrowing through a
‘peer monitoring system’ as a form of ‘social collateral’ – something which is missing in the
conventional banking system. Hence, microfinance has made it financially viable to lend to
the poor, which explains why it has become popular internationally. Among other things,
microfinance enables the poor to generate income, build assets and minimise their vulner-
ability to economic shocks. Furthermore, one of the greatest achievements of microfinance
is its contribution to empower women, which is a desired social transformation in patriarchal
societies to improve the health conditions and to meet the Sustainable Development Goals
(SDGs) (Loewe & Rippin, 2015; Mull, 2016; Pitt, Khandker, & Cartwright, 2006; Pronyk,
Hargreaves, & Morduch, 2007; Weber & Ahmad, 2014). Moreover, microfinance popularity
at the end of the twentieth century, particularly after the early work of development econ-
omists who advocated it as an effective instrument not only to alleviate poverty but also to
stimulate socio-economic development (Hashemi, Schuler, & Riley, 1996; Morduch, 1998,
1999a, 1999b, 2000; Pitt & Khandker, 1998; Pitt, Khandker, & Mundial, 1996; Schuler &
Hashemi, 1994). Nonetheless, prominent media coverage, particularly by leading channels
such as CBS News, the BBC, The Guardian, Financial Times and CNN, boosted the global profile
of microfinance institutions (GB in particular) and enhanced perceptions of its development
impact.
However, Duvendack et al. (2011) have raised the issue of weak methodologies employed
in microfinance impact evaluation studies. One of the most recent, advanced and robust
empirical techniques in microfinance impact evaluation is the incorporation of randomised
control and trial (RCT). This method has been commonly used in the medical field (see
Sibbald & Roland, 1998), where a treatment or experimental group is compared with a control
group to determine the effectiveness of a drug. To support the incorporation of RCT in
microfinance evaluation studies, Karlan, Goldberg, and Copestake (2009a) and Karlan,
Harigaya, and Nadel (2009b) claimed that it is the best method to evaluate the impact of
microfinance programmes as well as to improve the designs of various microfinance
products.
After incorporating the RCT method in microfinance impact evaluation, Karlan and
Zinman (2009) found that expanding credit supply indeed enhances welfare of the poor by
using an extensive data-set. Moreover, another study by them, (Karlan and Zinman 2011) in
the context of Philippine microfinance industry found that microcredit did enhance com-
munity ties, risk management and informal access to credit. However, the duo also observed
that the treatment group has fewer business activities and poor subjective wellbeing com-
pared to the control group. In a more recent study by Banerjee, Duflo, Glennerster, and
Kinnan (2015), after summarising the results of six different RCT evaluations of microfinance
in India, it was noted that the microfinance effect is modestly positive, but not transformative.
Apart from those RCT evaluation studies, the most recent comprehensive study so far that
comprises over 3,000 households in 87 villages and a 20-year period in Bangladesh was
conducted by Khandker and Samad (2014). They reiterated that microfinance indeed con-
tinued to help the poor by raising households’ welfare in various aspects. These aspects
range from increasing personal expenditure, households’ assets accumulation, empowering
women, increasing labour supply and children’s education among others. There is ample
empirical research to support the claim that microfinance loans are associated with higher
empowerment of women (Laha & Kuri, 2014; Nilakantan, Datta, Sinha, & Datta, 2013; Rehman,
Moazzam, & Ansari, 2015; Weber & Ahmad, 2014), which constitutes a significant social trans-
formation in patriarchal societies. Additionally, Weber and Ahmad (2014) found that in
Pakistan, women in higher loan cycles enjoy higher levels of empowerment compared to
relatively new loan beneficiaries. Due to these significant benefits, microfinance programmes
which follow the Grameen model have subsequently been replicated in developed countries
such as the United States, Canada, Germany and many other European countries to address
poverty and generate self-employment.
However, Bateman and Chang (2012) argue that microfinance poses a barrier to achieving
sustainable economic development goals. Instead of eradicating poverty, the high interest
rates charged by MFIs put the borrower in a ‘death trap’. The high cost of borrowing can
negate the social outreach aspirations of microfinance, as some of the poorest households
find the interest rates unbearable – and have to bear additional burdens from co-borrowing
peers, plus the risk of disrepute in the community should one default on a loan. Circumspection
against microfinance heightened in 2007, when a Mexican MFI, Compartamos, went for initial
public offerings (IPO) and charged interest rates as astronomical as 195% (Bateman & Chang,
2012). Professor Muhammad Yunus termed such outrageous profit-maximising MFIs as ‘new
loan sharks’ who exploit the poor (Mitra, 2009). However, the portfolio yield (average yearly
nominal yield on gross loan portfolio) in the South Asian microfinance sector has ranged
from 16% to 42%, with the highest average rates recorded in Afghanistan (Figure 1). The
microfinance sector in Bangladesh enjoyed a stable interest rate (22% to 26%) between 2005
and 2014.
The high interest rates in microfinance are mainly due to the high operating costs as
providing small amounts of loans for short-term periods substantially increases operating
expenses. Nonetheless, a number of microfinance studies have demonstrated interest rates
can be lowered through improvements in efficiency and productivity (Basharat, Hudon, &
Nawaz, 2015; Gutierrez-Nieto, Serrano-Cinca, & Molinero, 2007; Wijesiri, Viganò, & Meoli,
2015). Theoretically, an efficient and productive MFI should be able to provide financial
services to the poor with affordable interest rates because it can significantly reduce
43.%
40.%
37.%
34.%
31.%
YIELD
28.%
25.%
22.%
19.%
16.%
13.%
10.%
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Afganistan Bangladesh India Nepal Pakistan Srilanka
Figure 1. Portfolio yield in South Asian microfinance sector. Source: Mia (2017b).
operating expenses through optimising combinations of inputs and outputs (Mia & Ben
Soltane, 2016).
The microfinance sector also faces serious financial threat in some countries where clients
are severely over-indebted and default rates have risen. This over-indebtedness could be a
result of multiple borrowing and other associated factors (see Mia, 2017a). Suicides of some
of the microfinance clients reported in Andhra Pradesh ignited public outcry both in India
and around the world (Taylor, 2011). However, these claims have been questioned by Ashta,
Khan, and Otto (2015), who showed no or a very weak relationship between microfinance
and suicide incidents, while showing a strong relationship between suicides and banking
finance. Corruption in microfinance has also been highlighted by Moh’d Al-Azzam (2016)
and Sinclair (2012). The impact of microfinance on poverty, his way of simplifying complex
issues and use of hyperbolic language that seems more appropriate to a politician than a
scholar have garnered criticisms from across the globe.
3. Conceptual framework
The life cycle theory provides a powerfully simple and time-tested framework for profiling
sector characteristics to investigate the scope, structure and performance of that sector.
Since its introduction by Vernon (1966), the LCT has been extensively used in various indus-
tries and products to document phases of development, such as, transport (Andriankaja,
Vallet, Le Duigou, & Eynard, 2015), management (Gmelin & Seuring, 2014), information and
communication technology (Giachetti & Marchi, 2010; Li, Luo, Xie, Feng, & Du, 2015), edu-
cation (Garbade, Omta, Fortuin, Hall, & Leone, 2013), market orientation and pricing
(Mahapatra, Das, & Narasimhan, 2012; Wong & Ellis, 2007), gambling (Hashimoto, 2003), life
science (Grabner, Johnson, Abdulhalim, Kuznik, & Mullins, 2011), asset pricing and supply
chain (Basco, 2013; Jinnai, 2015). Thus, the use of LCT could enrich the existing microfinance
literature and unravel the dynamics of microfinance in various spheres. The potential for this
theory to inform the Bangladesh experience is also timely, in view of the country’s momen-
tous experiences with microfinance; presently, Bangladesh has the most extensive operations
in the world. Nonetheless, with the distinctive socioeconomic and political characteristics
of Bangladesh, as well as its longer history of microfinance, it is expected to provide a more
reliable track record from which other countries can draw lessons. Moreover, studying microf-
inance in Bangladesh is interesting because its longevity may have revealed problems that
are not yet evident in younger microfinance markets (Meyer, 2002). Thus, this study opted
to investigate microfinance markets in Bangladesh.
Following the LCT perspective, an item or product will be developed through research
in the initial phase. As the innovation becomes economically viable, the product would be
made and marketed by firms for sale to customers. As the product matures and the market
becomes saturated with it, demand for the product would start to decline. Ultimately, the
product would become obsolete and the technology to produce it becomes standardised.
Firms then relocate the production of that obsolete product abroad to access new markets,
while launching new products in the parent market. The lifecycle of a product can be divided
into five phases, namely, introduction, growth, maturity, saturation and decline or demise.8
Vernon’s (1966) approach attempted to study the pattern of relocation of international firms
from the United States, and, hence, focused on the evolution of the first three phases in the
developed countries and the last two in the developing countries. In our adapted LCT
approach, we examine all the five phases within Bangladesh.
Before we proceed to the discussion of various stages of development in microfinance
through the LCT nomenclature, it should be clearly noted that the LCT is not free from lim-
itation. Among others, Dhalla and Yuspeh (1976) explicitly discussed the shortcomings of
life cycle theory, highlighting ‘second life’ or reincarnation rather than death or demise.
Moreover, the length and slope of different market development stages may vary rather
than being constant (Levitt, 1965). Doubt also arises about the differences in product class,
product form and brand among the academicians (Cao & Folan, 2012); for example, product
complexity, degree of innovation and standardisation, availability of competitive substitutes
and how well the product fits with customer needs (Levitt, 1965). We should also emphasise
that LCT has limited capability to explain the true lifespan of a product or service, and occur-
rence of life cycle may not necessarily be certain in real life as it is inevitable in the human
life cycle.
Despite having its limitations, the added advantage of LCT is to translate the theory into
practice and learn from it. Despite the criticisms, Hayes and Wheelwright (1979) further
concede that
Irrespective of whether the product life cycle pattern is a general rule or holds only for specific
cases, it does provide a useful and provocative framework for thinking about the growth and
development of a new product, a company, or an entire industry. (p. 133)
Hence, this study decided to use the LCT approach based on the objective of this study:
understanding of microfinance and the country context (Bangladesh). Figure 2 shows the
historical development of microfinance, and provides a map of the various phases of devel-
opment since 1976 elaborated in the next section.
Based on the overall understanding of microfinance operations in Bangladesh, the dura-
tion of each phase is likely to be 10 years. Nonetheless, we also refer to arguments from
Zaman (2004) in a joint report published by Consultative Group to Assist the Poor (CGAP)
and the World Bank to classify various phases of the microfinance life cycle in Bangladesh.
Zaman (2004) stated that
Maturity
Stage-1 Stage-2 Stage-3 Stage-4 Stage-5

1976-1985 (1986-1995) (1996-2005) (2006-2015) (Prediction)
Time Horizon
1. Establishment of GB 4.Injection of funds 8.Innovations
5. Emergence of Regional 11.Multiple borrowing
2. Replication in other 9.Decentralization of
MFIs 12.Establishment of the regulatory
districts operation
6. Governance in authority (MRA)
3. Domestic promotion 10. Emergence of
microfinance 13.Emergence of mobile banking.
microfinance from
7. Global replication 14.Commercialisation and mission drift.
commercial bank
15.Removal of Yunus from GB
11. Year of Microcredit
Figure 2. Stages of development of microfinance in Bangladesh (1976–2015). Source: Authors’ adaptation

of the product life cycle theory.
the 1980s witnessed a growing number of non-governmental organizations (NGOs) experiment-

ing with different modalities of delivering credit to the poor. The various models converged
around the beginning of the 1990s toward a fairly uniform “Grameen-model” of delivering micro-
credit. This last decade, especially, saw a sharp increase in access to microcredit. In recent years,
the standard Grameen-model has undergone greater refinement in order to cater to different
niche markets as well as to different life-cycle circumstances. (p. 47)
In addition to that, we have also considered Ahmed’s (2004, 2009) discussions when classi-
fying the duration of the each stage (see Figure 3). This helps to simplify the LCT model and
discussion. However, the duration for each of the phases should not be treated as an absolute
measure as it may vary slightly.
4. Phases of microfinance development

We discuss in this section the main four stages that microfinance operations have passed
through in Bangladesh. The focus is on the industry as a whole rather than any single MFI
(except Grameen Bank in a few cases).
4.1. Stage1 (1976–1985): experimentation and introduction

Microfinance was introduced in Bangladesh during the mid-1970s, amidst economic turmoil
arising from the combined problems of being born as a new nation. Bangladesh then had
a financial environment where banking operations were limited and poor people were
excluded from such facilities. Their predicament was further exacerbated by the mushroom-
ing of village moneylenders charging usurious rates and the prevailing political instability
and economic stagnation. At Bangladesh’s independence in 1971, the country was emerging
from the liberation war with Pakistan, which had devastated the economy and aggravated
poverty, particularly in the rural areas. The situation was exacerbated by the great famine in
1974, when thousands of Bangladeshis perished as a result of the failure of the then newly
formed government to provide adequate assistance to over 80% of the total population
who were living below the poverty line during 1973–1974 (Hossain, 2014). Military coups
in 1975 further destabilised the economic situation. Economic growth at around 2% per
Figure 3. Number of MFIs in Bangladesh from 1970 to 2000. Source: Adapted from Ahmed (2009). Note:
The number of MFIs only include those responded to Credit and Development Forum (CDF) bi-annual
survey.
annum in the period 1971–1975 denied policy-makers the resources to help the poor.
Bangladesh had to rely on international aid from the United States, Japan, Soviet Union and
India to meet its development expenditure (Racioppi, 1994). However, even then the rural
areas remain largely isolated from aid. Massive famines, political instability and natural dis-
asters in the 1970s set the stage for the introduction of microfinance as a developmental
tool.
The Grameen Bank model of microfinance was developed after intensive research and
experimentation by Muhammad Yunus, a Bangladeshi economist who was trained in the
United States. Concerned over economic downfall and the harsh life of the poor in Bangladesh,
Muhammad Yunus was inspired to investigate such a failure while affiliated with Chittagong
University. He brought several students with him to the nearby Jobra village of Chittagong
district to experiment with novel approaches to assist the poor.9 After working with them,
he realised that most of the poor people were trapped in a vicious cycle of borrowing and
repaying as they did not have any financial capital for their small scale businesses. Moreover,
the women were repaying much of their earnings to capital providers at overpriced rates.10
Convinced by the villagers’ skills, efforts and hard work, he realised that these people
needed access to loans with affordable terms and conditions (Levin, 2012). So instead of
giving charity, Yunus created hope for the poor by establishing Grameen Bank. The concept
of modern microfinance started then, when he lent his own US$27 to 42 women in 1976
(Yunus, 2003). This small financial contribution created hope for their lives, means for their
employment and the vision of a generation without poverty. Nobody had provided such
financial services to them prior to Yunus. By doing so, he enabled poor female villagers to
break out of the cycle of debt. Due to his idea of providing financial services to the poor and
challenging the conventional banking system, Yunus has been globally recognised with
hundreds of high-level international and national awards.11
After years of negotiating with sceptical bankers and haggling with reluctant government
politicians and bureaucrats, Grameen Bank (GB) was officially established in 1983 as an inde-
pendent bank legislated by the government through the enactment of the ‘Grameen Bank
Ordinance –1983’. Initially, the mechanism of Yunus’s Grameen Bank used a group lending
concept whereby five people form a group voluntarily and a typical branch consists of seven
or eight groups (Morduch, 1999a). For any given group, the first two individuals will get loans
followed by the next two and subsequently the last person, usually over a period of a year
or 50 weeks. If any member of the group defaults, all other members in the group are denied
loans. This approach works because a morally binding group functions as a substitute of the
conventional collateral, which forms the fundamental operational framework in the Grameen
classic system (GCS). The branch setup in a typical MFI is done by a field manager and a
number of field officers who cover an area consisting of 15 to 22 villages by paying initial
visits to the area to familiarise themselves with the culture and needs of the prospective
clients (see Kabir Hasan, 2002; Morduch, 1999a). Inspired by the success of this classic model,
among others, the Bangladesh Rural Advancement Committee (BRAC), Association for Social
Advancement (ASA), Jagorini Chakra Foundation and Proshika gradually started microfinance
activities.
4.2. Stage 2 (1986–1995): growth and expansion

The growth of microfinance gained momentum from the mid-1980s when similar types of
MFIs were established across the country (Ahmed, 2009), which expanded strongly through
‘franchising’ as new branches replicated the procedures and norms of other branches of
their parent organisation (Zaman, 2004). The programme also witnessed another distin-
guished feature with the introduction of locally developed MFIs to serve the poor alongside
the leading MFIs countrywide. For example, Basic Units of Resources and Opportunities of
Bangladesh (BURO-Bangladesh), Tenghamara Mahila Sabuj Sangho (TMSS), and other leading
MFIs emerged from different regions to meet local financial demand of the poor.
While the Grameen Bank model is the leading microfinance scheme in Bangladesh, the
method has not remained static. It has observed gradual changes over the years, as the
model has been considerably affected by the suggestions of field workers, geographical
location and cultural norms. Some MFIs have modified the core principle of microfinance to
meet their operational philosophies (Khan & Ashta, 2013) and to provide better solutions
to the local community, which has resulted in various innovations in loan products and
financial services. For example, employees provided feedback that a majority of the poor
women are illiterate and lack entrepreneurial skills; hence, MFIs implemented financial lit-
eracy programmes and entrepreneurship training, which had not been included in the orig-
inal idea of GCS. Apart from entrepreneurial loans, MFIs also realised that people in areas
vulnerable to natural calamities need disaster loans to mitigate the effect of unexpected
disasters (Matin & Taher, 2001). MFIs started providing disaster loans with very flexible con-
ditions to local areas often hit by natural calamities. From an institutional perspective, there
have also been modifications in the operational model of the Grameen Bank to cope with
various types of risks (see Khan & Ashta, 2013).
However, the group-based lending method gave way to individual lending owing to
rising free rider problems among the group members. The relative failure of the group lend-
ing method was also caused by loose social ties (Lehnar, 2009), high operational costs asso-
ciated with group forming, group training and higher frequency of loan instalments (Shankar,
2007), penalties that discouraged good credit risk bearers (Giné & Karlan, 2014) and strategic
defaults and lower repayment rates (Kono, 2006). It is for these reasons GB discarded joint
liability schemes from 2002, which was followed by other MFIs in the sector (Kono, 2006).
Individual lending added impetus to the rapid growth of microfinance programmes in
Bangladesh. Indeed, Lehnar (2009) predicted that the demand for individual lending will be
further expanded in the sector, which is corroborated by the fact that it has significant impact
on extending its outreach, operational sustainability and low delinquency (Kodongo & Kendi,
2013). Although women are the ultimate target in microfinance programme, credit services
have also been extended to men. Nevertheless, the number of women clients still outnum-
bered men and accounted for 80–85% of Bangladesh’s microfinance denominated loans.
The sources of funding also played a significant role in expanding credit activities of MFIs
during the growth phase. The sector grew rapidly after the establishment of the Palli Karma-
Sahayak Foundation (PKSF), an apex body aimed at supporting financing activities of partner
MFIs established in 1990. The financing of microfinance operations was augmented by the
joint participation of international development agencies, including the World Bank, the
United Nations, Ford Foundation, Oxfam, Aga Khan Foundation, and other national and
international private donors. Nonetheless, the successful MFIs, particularly the leading and
large MFIs, such as BRAC, ASA, and Grameen Bank that had become financially stable,
declined to receive further donations (Zaman, 2004). Thus, most aid from international agen-
cies was channelled to newly formed MFIs.
Additionally, the growth of the sector was augmented by the well-documented and inno-
vative success stories of the poor people during this growth phase (Ledgerwood, 1998).
These success stories came at the moment when there were thousands of failures recorded
by state-run, donor-driven and international specialised financial institutions. The Nobel
Prize winner, Joseph Stiglitz (2003), called the decade the ‘Roaring Nineties’, which saw the
mainstream financial sector losing almost all sense of moral responsibility. The failure of the
rural banks to reach targeted poor households further diminished in Bangladesh during this
time (Khandker, 2005). Policy-makers turned to microfinance as an effective financing plat-
form to alleviate poverty. Apart from that, the lack of comprehensive formal regulation and
supervisory oversight fuelled the growth of microfinance in Bangladesh during the period
1986 to 1995 (Conroy & MacGuire, 2000).
This growth phase can also be referred to as a ‘scaling up’ phase, as microfinance became
institutionalised as the leading channel of financial support to the poor. Zaman (2004) dis-
tinguishes three important factors to elucidate its rapid expansion from the early 1990s:
leadership; staff incentives; and learning by doing. The leading MFIs strongly held on to their
conviction against scepticism in society that microfinance can be a viable and replicable
way for financing the poor. This vision attracted a dynamic workforce, which together with
training, organisational building and incentives, both monetary and non-monetary, boosted
the growth of the sector. Effective learning-by-doing also synergised the MFIs to orientate
their operations to the needs of the poor and the market. Furthermore, community feedback,
formal and informal assessments and academic evaluations of the programme further
strengthened the progress of MFIs. The spread of microfinance globally to East Asia, Latin
America and the Caribbean, and African countries since the early 1990s was a consequence
of the success achieved in Bangladesh.
4.3. Stage 3 (1996–2005): maturity

As microfinance operations grew rapidly to become crowded domestically, it acquired several
features over the period 1996–2005 consonant with the LCT’s maturity stage. It was at the
end of this period that microfinance, significantly through the contributions of Bangladesh,
gained global recognition, culminating in the United Nations’ declaration of 2005 as the
‘Year of Microcredit’. The maturity phase was characterised by a range of developments,
encompassing the formalisation of governance practices of MFIs, decentralisation of man-
agement practices, autonomy of branches, leadership skills development, inclusion of man-
agement information systems and controls (mostly in administrative operations), learning
from mistakes, employees’ incentives and standard procedures of recruitment. Gradually,
the sector started to invest in human capital development, computerisation of operational
activities and began reducing dependency on donors. In addition, MFIs from Bangladesh
started to establish international branches in various regions across Asia, Africa and the
Americas.12 Figure 3 shows two important attributes of microfinance that relate to the LCT.
First it shows growth between 1985 and the mid-1990s, subsequently a gradual slowdown
until 2000 in the growth in number of MFIs in Bangladesh.
Innovation also characterises mature microfinance markets. The shift from GCS to the
Grameen general system (GGS or Grameen-II) proceeded during this phase, and is considered
one of the key milestones in microfinance operations, drawing on experiences of the preced-
ing two decades of operation. This was prompted by at least two significant events: first, the
boycott movement in 1995 by male chauvinists and religious fundamentalists, who disap-
proved of the activities of GB and pressured borrowers to stop repayment of loan instalments;
second, a huge flood which undermined economic activities in Bangladesh in 1998 (Mainsah,
Heuer, Kalra, & Zhang, 2004). These two events grossly raised financial defaults by the poor
borrowers to lower repayment rates, thereby posing a credible threat to the financial sus-
tainability of MFIs. Consequently, the existing microfinance model during that time was
redesigned by GB into Grameen-II, which includes comprehensive saving products, improve-
ment of loan contracts and flexibility in loan repayments. Grameen-II gained popularity
quickly due to its distinctive and well-received financial features. A comprehensive discussion
on Grameen-II and its various financial products can be found in Rutherford (2006) and
Dowla and Barua (2006).
While conventional microfinance loan products were dominating the industry, the initi-
ation of asset transfer programme as suggested by the field workers to target the ultra-poor
in Bangladesh was started in 2002 by BRAC, with a coverage of 100,000 households (Mair &
Marti, 2009). This is one of the prompt delivery mechanisms to provide a local solution to
the extremely poor districts, such as Rangpur, Nilphamari and Kurigram (located in the north-
ern part of Bangladesh). The main purpose of initiating such a programme is to target the
ultra-poor women because they are most likely to stay in the home due to sociocultural and
religious norms (Meyer, 2002; Roy, Ara, Das, & Quisumbing, 2015). Such asset transfer pro-
gramme by MFIs in Bangladesh is largely effective and a hope for the marginalised (Krishna,
Poghosyan, & Das, 2012; Raza, Das, & Misha, 2012; Roy et al., 2015). Moreover, when Safe
Save realised that frequent small deposits by the poor could guard their spending tempta-
tion, they started to collect savings by employing a (poor) worker (who can also be a member)
from the collection area (Sengupta & Aubuchon, 2008).13 This has helped in at least two
ways. First, the convenience for the poor who want to deposit; and second, the low cost for
the institutions, as they employ locals who can understand the needs of the poor better.
Nonetheless, the savings services provided by MFIs also gradually changed over the years
from compulsory to flexible savings schemes with various attractive features (short term,
long term and savings for non-members) as discussed by Dowla and Alamgir (2003).
Moreover, after two rounds of face-to-face interviews with Yunus, Esty (2011) comprehen-
sively discussed the gradual change in operational activities of Grameen, the management
style and several innovations (including savings scheme).
Moreover, to meet intergenerational aspirations and mobility responses of the microfi-
nance clientele in Bangladesh, leading MFIs started to provide scholarships, stipends and
education loans (Cumming, Dong, Hou, & Sen, 2017). For example, Grameen Bank established
higher education loans (through Grameen Kalayan) with very marginal interest rates for the
children of its clients. Until 2015, Grameen Bank provided education loans to 53,357 students
with an estimated value of US$49.94 million (Grameen Bank, 2015). BRAC was even more
advanced in ensuring the education for the poor by establishing over 14,153 primary schools
that have accommodated 5.3 million students to date.14 Moreover, BRAC University (http://
www.bracu.ac.bd/) and ASA University (http://www.asaub.edu.bd/) were established in
Bangladesh by the two leading NGO-MFIs to provide higher education facilities to the masses
and staff of the MFIs.
Other important innovations in microfinance included Green Microfinance (GM),
Microfinance Plus (MP) (also known as credit-plus) and Micro Health Insurance (MHI), which
were initiated during the mature stage to retain customers while attracting new ones. Indeed,
the new instruments have assisted microfinance operatives to compete well by enhancing
their management of reputational risk with commercial banks and state banks, albeit the
focus of the former is on the poor (Biosca, Lenton, & Mosley, 2014a). These innovations were
initiated during the growth phase, but were not scaled up during that time due to the una-
vailability of funds and donors’ focus on financial sustainability issues (Goldmark, 2006).
Hence, these instruments gained momentum during the maturity phase when MFIs had
already shown some level of financial viability (Biosca, Lenton, & Mosley, 2014b; Lanao-Flores
& Serres, 2009; Viswanath, 2015).
GM and MP ideally operate in tandem. On the one hand, GM provides basic incentives to
the poor in energy- and environment-related activities to encourage environment-friendly
practices and sustainable development, such as in the formulation of environmental policy,
clients environmental risk assessment, use of environmental friendly technologies in organ-
isations, intervention in improving use of energy efficiency, organic production, ecotourism,
agroforestry, recycling and creating mass environmental awareness in the society (Forcella
& Hudon, 2016). On the other hand, MP provides developmental services to clients, including
human development training, capacity building, housing, education, health, disaster man-
agement, marketing of products and, most importantly, information related to basic civil
rights. MP basically constitutes non-financial services that are provided to the socially under-
privileged (Lensink, Mersland, & Nhung, 2011). The Grameen Bank, BRAC, ASA, TMSS and
other leading MFIs still promote MP- and GM-related services.
To enhance the health status of the poor, the MHI scheme started to cover health-related
financial expenses of the poor by generating small and regular payments from the clients
as a premium that substantially reduces their vulnerability (Mosley, 2003). This was started
by GB in 1996, when it incorporated health services for the poor through the establishment
of the Grameen Kalyan (Wellbeing). The MHI service by GB officially started in 1997 and
aimed to work both as an insurer and service provider (Ahmed, Islam, Quashem, & Ahmed,
2005). In 2001, BRAC officially started the ‘Micro Health Insurance project for Poor Rural
Women in Bangladesh (BRAC-MHIB)’ with financial and technical assistance from the
International Labour Organisation (ILO). This initiative shaped and expanded micro-insurance
activities across the country (Matin, Imam, & Ahmed, 2005). According to Werner (2009), the
top three MHI providers of GB, BRAC and Society for Social Service (SSS) had 115,000 poli-
cy-holders and 560,000 lives insured under the scheme in Bangladesh.
The successful expansion of MFIs and the financial viability of their operations attracted
the interest of commercial banks to provide microfinance services in Bangladesh. The Islami
Bank of Bangladesh Limited (IBBL) was the first, when it started the ‘Rural Development
Scheme’ in late 1995 (Alamgir, 2010). Furthermore, state banks, such as Rajshahi Krishi
Unnayan Bank and Bangladesh Krishi Bank, and commercial banks, such as BASIC Bank, Ansar
VDP, National Bank and Trust Bank, started to finance small- and medium-scale enterprises
to foster entrepreneurship among the poor (Mia, 2016). In 1998, CGAP welcomed the entry
of commercial banks into microfinance activities and described them as ‘new actors in the
microfinance world’ (Isern & Porteous, 2005). However, microfinance has remained a small
share of operations of commercial banks and tends to be targeted at small-scale operatives

led by financially sound owners (Mia, 2016).
4.4. Stage 4 (2006–2015): saturation

Although the conferment of the Nobel Peace Prize in 2006 to microfinance and Professor
Muhammad Yunus spurred the expansion of microfinance to other countries, the sector has
showed signs of overcrowding in Bangladesh. The potential market for microfinance in its
original form had reached its limit, suggesting the onset of a saturation phase. This is evi-
denced by the difficulty faced by the Bangladesh Institute of Development Studies (BIDS)
in finding a control village with no MFIs in operation (Chaudhury & Matin, 2002). In that
context, MFIs were only able to expand their shares in the market by squeezing out others’
shares. The market share of the largest two MFIs in terms of total loans outstanding fell from
57% in 2009 to 48% in 2014 (MRA, 2009, 2014). On one hand, the total number of clients
(including borrowers, savers, micro-insurance holders and non-financial beneficiaries) and
borrowers (who had loan outstanding with MFIs) in Bangladesh, which had peaked in 2011
following a dip in 2007, began to fall thereafter (Figure 4). On the other hand, the average
number of clients per branch gradually decreased from 2006 to 2012, and then remained
relatively stable from 2013 to 2015 (Figure 5). This declining trend of total and average
numbers of clients per branch is mainly due to the rapid horizontal expansion in a geograph-
ically saturated market. For example, based on Table 2, it can be understood that the number
of branches was gradually increasing from 2007 to 2012, and then followed a decline until
2015. In response, the average number of clients gradually decreased until 2012 and
remained stable after a sudden increase thereafter. A similar trend can also be observed for
the average number of borrowers per branch.
Another salient state of saturation is the presence of multiple borrowing (also known as
‘cross membership’). Multiple borrowing simply refers to multiple microfinance membership
by an individual or a household. When an individual borrower takes loans from more than
one MFI, it is called ‘individual multiple borrowing’, and if more than one person from the
same household borrows from the same or different MFI, it is called ‘multiple household
borrowing’ (Faruqee & Khalily, 2011). Figure 6 describes the trend of multiple borrowing in
the microfinance sector in Bangladesh from 2002 to 2009. Faruqee and Khalily (2011) found
27.00
25.00
23.00
Million
21.00
Clients (Million)
19.00 Borrower (Million)
17.00
15.00
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Year
Figure 4. The trend of total clients and borrowers in the microfinance sector in Bangladesh (2006–2015).
Source: Authors’ computation from various MRA annual reports.
2000
1800
1600
Number
1400
Clients per branch
1200 Borrower per branch
1000
800
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Year
Figure 5. Average number of clients and borrowers per branch (2006–2015). Source: Authors’ computation
from various MRA annual reports.
that individual and multiple household borrowings grew more than twofold during 2002–
2009. Moreover, the trend of multiple household borrowing remains higher with that of the
former, and a wider gap can be observed between them in the later period of that study.
Rational borrowers when facing smooth loan application processes tend to encourage family
members to obtain loans for themselves, increasing their borrowings from MFIs.
Under certain conditions, multiple borrowings could represent negative developments
for the poor and society at large as the system becomes biased towards borrowers with a
track record rather to serve new borrowers. This is because when significantly large loans
are taken out by a few borrowers, access for potential new borrowers from the poorest of
the poor becomes low when loan reserves reach exhaustion. Yet, multiple borrowing can
also be a drain on the poor. For example, Chaudhury and Matin (2002) observed that ‘some
households went without food when they had difficulty in repaying loans as a consequence
of multiple borrowing’, p. 51. This has also forced borrowers into ‘debt trap’ or ‘debt peonage’;
such borrowings are no longer pulling them out from the vicious cycle of poverty (Fafchamps
& Gubert, 2007; Faruqee & Khalily, 2011). This multiple borrowing is further caused by the
outcome of loan pushing (an attempt to increase the market share), consumption loan, size
of the loan15 and characteristics of borrowers and households. Recently, Mia (2017a) has
comprehensively discussed how the interaction between demand- and supply-side factors
promote multiple borrowing in microfinance.
The saturated market has also adversely impacted the financial performance of MFIs. For
example, the loan recovery rate, (a proxy of the quality of the loan portfolio), has been neg-
atively affected, which is apparent because of expanding credit in the saturated market to
the pool of borrowers, thereby deteriorating portfolio quality, and with that raising exposure
to risky loans (Gonzalez, 2010; Lutzenkirchen & Weistroffer, 2012). Gonzalez (2010) argues
that when market penetration rates exceed 8% of the total population, portfolio quality
diminishes. In the case of Bangladesh’s microfinance sector, on average the market pene-
tration rate is above 25%, which is three times higher than the threshold estimated by
Gonzalez (2010). Despite a few oscillations, the loan recovery rate remained relatively stable
from 2008 to 2013 in the microfinance industry of Bangladesh; however, the overall industry
recovery rate dropped over 2% in 2014 (Table 2). By looking at the loan collection rate for
one of the largest MFIs, Grameen Bank, it could be seen that there was indeed a declining
trend between the period of 2002 to 2013 (Roodman, 2010). While the highest loan collection
Table 2. Basic indicators of NGO-MFIs in Bangladesh (2006–2015).
Particulars 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
No. of licensed NGO- MFIs 641 344 293 419 516 576 590 649 742 753
Branch 12,156 11,112 13,636 16,851 17,252 18,066 17,977 14,674 14,730 15,609
Borrower to client’s ratio (%) 75.01 81.66 75.86 76.02 75.99 79.18 78.37 78.33 77.34 78.27
Loan outstanding (LO) (taka, billion) 75.20 85.87 134.68 143.13 145.02 173.79 211.32 257.01 282.20 352.41
LO (US$, billion) 0.96 1.10 1.73 1.83 1.86 2.23 2.71 3.30 3.62 4.52
Loan outstanding per branch (Mill) 6.19 7.73 9.88 8.49 8.41 9.62 11.76 17.51 19.16 22.58
Total savings (TS) (taka, billion) 27.64 37.76 47.38 50.61 51.36 63.30 75.25 93.99 106.99 135.41
TS (US$, billion) 0.35 0.48 0.61 0.65 0.66 0.81 0.96 1.21 1.37 1.69
Savings to LO ratio 36.76 43.97 35.18 35.36 35.42 36.42 35.61 36.57 37.91 37.39
Recovery rate (%) 90.00* 95.00* 98.06 97.93 97.35 95.52 97.74 97.69 95.64 96.02
Source: Authors’ compilation from various MRA annual reports.
*Reported as equal or above 90% and 95% for 2006 and 2007 respectively. 1US$=BDT 79.95.
BusInEss HIsTory
719
Individual and Households Multiple Borrowing Rates

45
42.51
40
37.77
35 33.92
30 29.91 31.02
26.4 27.86
Percentage
25 25.07
23.05 22.76
20 19.96 19.97
17.27 17.4
15 14.77
13.16
10
5
0
2002 2003 2004 2005 2006 2007 2008 2009
Individual overlapping Households overlapping
Figure 6. Multiple membership in Bangladesh Microfinance sector (2002–2009). Source: Authors’

calculation based on the estimates of Faruqee and Khalily (2011).
100.0%
99.5%
99.0%
98.5%
98.0%
97.5%
97.0%
96.5%
96.0%
6/02 12/02 6/03 12/03 6/04 12/04 6/05 12/05 6/06 12/06 6/07 12/07 6/08 12/08 6/09 12/09 6/10 12/10 6/11 12/11 6/12 12/12 6/13 12/13
Period (semi-annual)
Figure 7. Grameen Bank loan collection rate (amounts due actually paid) (2002–2013). Source: Roodman
(2010).
rate was 99% in 2003, the lowest was in the year of 2011 (slightly below 96.5%) (Figure 7). It
can be argued that multiple borrowing increases liability and irregularity of loan repayments
contributes to low recovery rates or loan collection rates (Chaudhury & Matin, 2002; Mpogole,
Mwaungulu, Mlasu, & Lubawa, 2012).
Furthermore, the ‘commercialisation’ aspect of microfinance has been an increasing con-
cern among academics and policy-makers, raising questions and debates on whether microf-
inance has suffered from ‘mission drift’ and deviated from its founding purpose of serving
the poorest of the poor. Although the initial aim was to help poor borrowers without any
financial gain, profit motives now encroach on the operation of MFIs. This commercialisation
and corresponding high interest rates confine social outreach, because MFIs find it easy to
make profits by providing larger loans to wealthier clients and allegedly bypass the poorest
of the poor (Abrar & Javaid, 2014; Lensink, Meesters, & Hermes, 2011; Perera, 2010).16
Moreover, the former are the lower-risk borrowers to whom MFIs gravitate, as they wish to
make fewer but larger loans with less risk as part of the commercialisation drive. Data also
show that the average loan size per borrower steadily grew from 2006 to 2008 and became
stagnant from 2008 to 2010 and then increased again from 2011 to 2015 in the microfinance
sector in Bangladesh (Figure 8). This stagnation from 2008 to 2010 could be attributed to
the global financial crisis in 2008/2009 that shrank the financing opportunities of MFIs, both
2015
2014
2013
2012
2011
Year
2010 Average savings

Average loan
2009
2008
2007
2006
1000 3000 5000 7000 9000 11000 13000 15000 17000 19000
Amout (BDT)
Figure 8. Average loan outstanding and savings in MFIs (2006–2015). Source: Authors’ computation from
various MRA annual reports.
from the local and international capital markets, as well as contractionary policy intervention
by MFIs as a response to the crisis.
This shift of commercialised MFIs to provide larger loans to the non-poor is justified by
their claims that poor people are riskier and granting loans to them retards the quality of
the loan portfolio and increases non-performing loans cum lower profits. Due to these com-
mercialisation intentions, Sinclair (2012) pointedly argues that today’s microfinance has been
hijacked by the profiteers, and urges the respective authorities to reclaim it for the greater
benefits of the poor. Moreover, the mission drift may also result from particular lending
methodology, market focus and gender bias (Mersland & Strøm, 2010). The duo found that
the average cost significantly increases when focused on group lending, rural market and
more female customers. Thus MFIs may allegedly turn to provide individual loans, clients
from urban areas and focus on fewer women to minimise their cost of operation. In line with
the market focus of MFIs, Sharma and Zeller (1999) also claimed that there is a tendency of
MFIs to locate their branches or establish a new MFI in more well-off areas. The institutional
transformation of the microfinance industry through regulation might have an effect on the
commercialisation of microfinance services. For example, through regulation, an NGO could
be transformed into a share-capital company (Dreihann-Holenia, 2009; Ledgerwood & White,
2006) or enable them to take deposits and other financial services. This regulatory transfor-
mation may lead to mission drift as it allows NGOs to transform into profit-making entities.
Empirical evidence has also suggested that regulatory transformation in the microfinance
industry reduces social outreach as it significantly increases average loan size (Wagenaar,
2012). However, whether or not this commercialisation or mission drift is further exacerbated
by the involvement of commercial banks, state-owned banks, credit unions or financial
cooperatives requires further attention from academics.
Recognising the problems arising from a saturated market, the government responded
by establishing a regulatory authority to supervise and control the microfinance sector in
Bangladesh. The Microcredit Regulatory Authority (MRA) was officially established in 2006
through the ‘Microcredit Regulatory Act 2006’. Since then, the microfinance sector in
Bangladesh has observed some changes targeted at averting further saturation through
controlling the number of MFIs in the industry, which is a move that was welcomed by both
the policy-makers and practitioners. Although the job scope of MRA is diverse in nature,
they are mostly seen to be active in issuing, rejecting or withdrawing licences of MFIs.
However, the effectiveness and fiscal strength of the MRA to maintain a healthy and condu-
cive microfinance environment has remained a challenge.
Moreover, the news that sparked the global media is the ousting of Muhammad Yunus
in early 2011 from the Grameen Bank. This political intervention, which did not follow normal
procedural justice, surprised many people inside and outside of Bangladesh. The government
invoked his age as the reason (retirement age is 60 years for the staff of Grameen Bank). In
response, Yunus vociferously argued that although he exceeded the government age limit
in 1999, the central bank never raised any issue with his continual role in the institution.
There is a common perception that the political interference of Muhammad Yunus started
when he publicly considered entering politics during a politically turbulent period in 2007.
The dominant political parties and powerful individuals within the present government did
not welcome such initiatives, perceiving him as a threat to their political careers, and thus
removed him from the institution that he had founded (CBS News, 2011). The Grameen Bank
is under the direct control of the Central Bank of Bangladesh, a government dominated
institution in the country.
Nonetheless, the report by a Danish journalist named Tom Heinemann uncovered a com-
plex financial transaction that took place in the mid-1990s involving donations by the devel-
opment agencies of several countries (Norway, Sweden, Germany, USA and Canada)
(Heinemann, 2011; The Guardian, 2011). This news made worse an already tenuous relation-
ship with the political parties. Although the report claimed that Yunus mishandled a huge
number of donations by illegally transferring them from Grameen Bank to another entity
(Grameen Kalyan) to gain tax incentives, the government of Norway quickly announced that
the issue has been settled amicably long ago and cleared him of any wrongdoing. However,
the government of Bangladesh still insisted that he step down, continually raising this finan-
cial matter and pressing for transparency and accountability of Grameen Bank activities. It
is widely understood that Yunus and Grameen Bank are like both sides of a coin; however,
Yunus has also been criticised for a lack of successive candidates for a smoothing transition
of the governance of Grameen. This has been reflected by the opinion of experts, as they
fear for the future of Grameen in the absence of Yunus, which potentially may cause a huge
number of clients and staff to leave Grameen (Wharton, 2011).
Despite various issues and challenges during this stage, the saturation phase was also
characterised by the advent of technology-based services such as mobile banking to target
clients. Although the use of technology in microfinance operation is not new, using it to
target clients is relatively new. Despite being in its nascent stage, there is a potential for such
services to expand in the market (Islam, 2013). The leading NGO-based MFI in Bangladesh,
BRAC, pioneered an innovation called ‘bKash’.17 The microfinance sector has benefited
through the scaling up of these innovative financial products to provide trouble-free and
reliable financial services to clients, which has reduced the cost of operations and bolstered
financial sustainability among MFIs.
Table 3. Average loan over GNI per capita (%) in selected South Asian countries.
Country Gross loan portfolio (USD, billion) Active borrower (million) AVLGNI (%)
Afghanistan 0.13 0.15 149.425
Bangladesh 6.2 24.68 18.888
India 14.19 49.76 16.974
Nepal 0.48 1.14 57.678
Pakistan 1.05 4.01 17.341
Source: MIX Market & World Bank.
Note: AVLGNI = Average loan/gGross national income per capita (current US$, 2016).
4.5. Stage 5 (since 2016): decline?

In our assessment of microfinance in Bangladesh, its recent slowdown will likely persist and
its developmental role in Bangladesh will gradually diminish. We believe that the decline
phase will begin from 2016 on the basis of the 10-year periodisation of each phase and the
mounting problems arising from saturation; this assessment is supported by both other
development policies launched by the government to assist the poor and Bangladesh’s
graduation from a least-developed country to a lower-middle-income country in 2015. In
recent years, the Bangladesh government has launched various programmes to combat
poverty and enhance socioeconomic development of the poor, such as ’Kabikha-Kajer
Binimoye Khaddo18 and Ektee Bari Ektee Khamar & Palli Sanchoy Bank19. Microfinance has
evolved largely due to poor households’ lack of access to finance; its rationale depends on
the persistence of poverty and gaps in the financial system. With poverty reduction and
public provision of social services and welfare transfers, larger sections of society enjoy
upward social mobility, and the scope and relevance of microfinance diminishes.
Improving economic conditions have also coincided with a decline in donations to
Bangladesh’s microfinance sector.20 Moreover, the demand for large credit and comprehen-
sive financial services offered by commercial and state banks has systematically increased
as Bangladesh has graduated from a ‘low-income’ country to ‘lower-middle-income’ country
(World Bank, 2015). This graduation is simply a recognition that the preferences among
customers as supported by the findings of Moh’d Al-Azzam and Mimouni (2016) show that
the use of microfinance has gradually declined owing to rising per capita income. Empirical
studies in the recent literature also found that GDP growth is likely to increase the average
loan size, which generally indicates a wealthier clientele (Mia & Lee, 2017). Furthermore, MIX
Market also set the benchmark such that if the ratio of average loan outstanding balance
over GNI per capita (AVLGNI) is above 250%, it would not be considered a microloan; if the
ratio is 20% or below, then it could be claimed that MFIs are serving the very poor (Rosenberg,
2009). By looking at AVLGNI in Table 3, it is evident that, on average, the AVLGNI is below
20% only in Bangladesh, India and Pakistan, while the ratio is 149.425% and 57.678% in
Afghanistan and Nepal respectively in the South Asia region. In contrast, the AVLGNI was
60% in sub-Saharan Africa, while the global average was around 29% in 2013 as per the MIX
market data (Ashta & Khan, 2015). Among all MFIs that reported to MIX Market, only about
5% of MFIs had an average loan size exceeding the maximum threshold of 250% of GNI per
capita; thus, they would certainly not be considered as serving the very poor (Ashta & Khan,
2015).
5. Conclusion
Although the history of formal and informal lending arrangements dates back several
centuries, the unique socioeconomic and macroeconomic conditions in Bangladesh, as well
as the successful application, gave microfinance the identity as an incisive instrument for
redressing hardcore poverty. Its success and effectiveness in combating poverty led to the
massive spread of the programme domestically in the early 1990s. Donor funds and con-
cessionary loans from the apex bodies, such as PKSF, along with the leadership of MFIs, and
learning that led to both the correction of mistakes and the diffusion of successful practices,
helped fuel the growth of the sector.
The microfinance sector underwent cycles fairly consistent with Vernon’s (1966) LCT, such
as experimentation and introduction, growth, maturity, saturation and eventually decline.
The prominent innovations occurred in the maturity phase through savings, improvements
in loan contracts, MHI, GM and MP. Microfinance has become increasingly environment
friendly as a consequence of those innovations. The success achieved by MFIs gradually
attracted commercial and state banks to adopt microfinance instruments in their lending
portfolios, which was welcomed by the international community to enhance competition
in the sector.
Saturation led to MFIs encouraging multiple borrowing, which has proved to be a negative
development both for the poor and society at large. Multiple borrowing led to a deterioration
of the loan portfolio, thereby undermining the recovery rate so as to threaten the financial
sustainability of MFIs. Saturation also led to the ‘commercialisation’ of some activities so that
the interests of the poor were neglected. On this regard, despite the establishment of the
MRA in 2006, addressing these issues has remained a challenging task. Nevertheless, the
MRA could take effective policy initiatives to mitigate multiple borrowing through, inter alia,
creating a borrowers database and exchange of information between MFIs regarding client’s
status. In addition, the MRA should prioritise tackling the ‘commercialisation’ of MFI activities
and MFIs’ deviation from their original objective of helping the poor. Notwithstanding, the
sector started technology-based financial services (mobile banking), in 2011 and currently
in its nascent stage. This initiative should be encouraged and promoted through monetary
and technical assistances as a way to reduce operating expenses and to ensure hassle-free
reliable financial services for the poor. Apart from that, the management of MFIs should
nurture good management practices that can ensure financial viability and outreach goals
of MFIs simultaneously.
While the origin, growth and maturity phases heralded major developments that stimu-
lated expansion and poverty alleviation, it is important to recognise that particular policy
instruments may face saturation and decline once their objectives have largely been met.
The demand for credit will persist, and therefore the extent to which MFIs exit the market
or reinvent themselves will depend considerably on the regulatory framework. Identification
of the poor will also impact on the scope of microfinance’s clientele and operations. Thus,
the possibility of new developments changing the course of the microfinance sector cannot
be ruled out, as poverty remains one of the great challenges in Bangladesh (Bangladesh
Economic Review, 2014). Nonetheless, the evidence shows that it can certainly be adapted
for adoption in other countries where the hardcore poor suffer from a lack of access to
finance. While microfinance will foreseeably decline in scale, the pace and manner of this
process is contingent these circumstances.
While we attempted to provide a comprehensive account of microfinance in Bangladesh,

this study raises important questions to be answered by future investigation. For instance,
there is still a need to amass stronger empirical evidence on how commercialisation and
multiple borrowing have affected the sector. Moreover, examining the effectiveness of the
regulatory authority and formulating prudential policies to ensure financial access to the
poorest of the poor in response to the mission drift and commercialisation aspects of the
MFIs require further research.
Notes
1.
For a brief history of other countries microfinance market, see, Kabir Hasan (2002).
2.
The two bottom lines or ultimate goals of microfinance are ‘financial sustainability’ and ‘social
outreach (sometimes referred to as outreach only)’.
3.
GB, which literally translates into ‘village bank’, is one of the largest MFIs in Bangladesh that
serves small-scale loan facilities to over seven million people. Although the history of GB can
be traced back to 1976, GB was only officially established in 1983 as an independent bank by
government legislation. Currently, 90% share of the bank is owned by its borrowers and the
remaining 10% by the government.
4.
For brevity, we assume the homogeneity between product life cycle and industry life cycle.
5.
Vernon (1966) had analysed the phases of new product launch, maturity and decline, and how
multinationals determine location decisions on the basis of these phases.
6.
A comprehensive definition of mission drift can be found in Mia and Lee (2017).
7.
Loan size and definition of what constitutes ‘the poor’ greatly varies between countries.
According to World Bank (2017), Bangladesh has approximately 28.1 million poor people in
2010, each earning less than US$1.9 a day. Average microfinance loan size (disbursement) in
Bangladesh was approximately US$379 (BDT31,154) in 2015 (MRA, 2015).
8.
Maturity and saturation are sometimes combined together to form a single stage in LCT.
9.
Chittagong is the commercial capital of Bangladesh and second largest city after Dhaka. Please
see Mia, Nasrin, Zhang, and Rasiah (2015) for more details about the city.
10. Please see Islam (2012) for a detailed policy climate during that time in Bangladesh.
11. Awards include the Nobel Peace Prize, Presidential Medal of Freedom (the Highest Civilian
Honour in USA), Congressional Gold Medal (USA) and honorary doctorate degrees from over
20 countries. Additionally, Yunus also received the highest national awards in Bangladesh
including the Presidents’ Award, Central Bank Award and Independence Day Award among
others.
12. For example, BRAC is operating in several countries, including Afghanistan (since 2002),
Pakistan, Myanmar, Sri Lanka, the Philippines, Haiti, Sierra Leone, Liberia, Tanzania, and Uganda.
13. SafeSave was established in 1996 as an MFI, which works in eight low-income areas in Dhaka.
Currently, it is now a project of BRAC. For more details, see http://www.safesave.org/home.
14. For more details, see http://www.brac.net/education-programme/item/761-brac-primary-
schools
15. Due to small average loan size, people may borrow from various MFIs and tie them together
for business expansion or new venture.
16. Generally, poor people demand a small amount of loans and average loan size is used as a
depth of outreach indicator in the existing literature. The smaller the size of average loan, the
greater the depth of outreach.
17. bKash, established in 2011 as a joint venture between BRAC Bank Ltd. and Money in Motion
LLC, USA, gained popularity in a very short period of time. The ultimate objective of bKash is
to ensure access to a broad range of financial services for the people of Bangladesh. (For more
information, see http://www.bkash.com/about/company-profile).
18. Food-for-work.
19. One House One Farm and Rural Savings Bank. For more details, please see, http://www.ebek-
rdcd.gov.bd/.
20. The year-wise share of donations as part of the total loan outstanding were 3.02, 2.7, 3.82, 3.07,
2.54 and 2.19% in the year of 2009, 2010, 2011, 2012, 2013 and 2014 respectively. For more
details, see MRA (2014) annual reports.
Acknowledgement
We are very grateful to Professor Andrea Colli and several anonymous reviewers for their constructive
comments and suggestions on earlier versions of this article. Their thoughtful remarks have substan-
tially improved the quality of the article. The first author also acknowledges informal academic discus-
sion with Dr. Zhang Cheng (Dana), Dr. Hasanul Banna, Dr. Muhammad Mehedi Masud, Dr. A.S.A Ferdous
Alam, Dr. Abu Hanifa Md. Noman bin Alam, Shamima Nasrin, Halima Begam Shilpi and Khaled Saifullah
on various occasions while preparing this manuscript. All errors that remain are our own responsibility.
Disclosure statement
No potential conflict of interest was reported by the authors.
Funding
Md Aslam Mia and Mahfuzur Rahman received funding from the Centre for Poverty and Development
Studies (CPDS), Faculty of Economics and Administration, University of Malaya (Grant no: PD002-2017).
Notes on Contributors
Md Aslam Mia holds a Ph.D. in economics from University of Malaya, Malaysia. He is currently working in
a research project (microfinance and environmental sustainability) funded by the Centre for Poverty and
Development Studies, University of Malaya. His research interests include productivity of microfinance
institutions, market structure, economic development, urbanization and sustainable development. His
thesis focused on how microfinance can be an important avenue to promote sustainable development
in Bangladesh. The findings of his thesis provided solutions on how MFIs can achieve productivity to
ensure long-term economic viability and provide best financial services to the poor. He has published
articles in Social Indicators Research, Medicine, Cities, Quality and Quantity, Economic Analysis and
Policy, Strategic Change and other internationally reputed journals. He has also served as a referee on
an ad hoc basis for several peer-reviewed international journals.
Hwok-Aun Lee is Senior Fellow in the Institute of Southeast Asian Studies (ISEAS), Singapore. He has
researched and published works on affirmative action, discrimination, inequality, social protection,
labour and education, with a focus on Malaysia, as well as comparative study vis-à-vis South Africa
and Southeast Asia. Among his publications are “Affirmative Action Regime Formation in Malaysia
and South Africa” Journal of Asian and African Studies (2016), “Discrimination of high degrees: Race
and graduate hiring in Malaysia”, Journal of the Asia Pacific Economy (2016), “From Asian to Global
Financial Crisis: Recovery Amidst Expanding Labour Precarity”, Journal of Contemporary Asia (2014),
and “Affirmative Action in Malaysia: Education and Employment Outcomes since the 1990s”, Journal
of Contemporary Asia (2012).
VGR Chandran is an Associate Professor at the Department of Development Studies, Faculty of
Economics and Administration, University of Malaya. He holds a PhD in Economics and his research
focuses on industrial development, trade, innovation and technology policy and policy evaluation.
Rajah Rasiah is Professor of International Development at the Asia Europe Institute, University of
Malaya. He obtained his doctorate in Economics from Cambridge University in 1992, and was a Rajawali
fellow at Harvard University in 2014. While the prime focus of his research is on science, technology
and innovation infrastructure, he has also worked extensively on economic history, industrial policy,
foreign investment, human capital, public health and environment. He is the 2014 recipient of the Celso
Furtado prize from the World Academy of Sciences for advancing the frontiers of Social Science thought.
Mahfuzur Rahman holds a Ph.D. from University of Malaya, Malaysia. Currently, he studies the relevance
of psychological biases in individual investment behaviour. He models behavioral factors in investigat-
ing financial decision making, financial risk tolerance, and portfolio diversification. He teaches corporate
finance, advanced managerial finance, financial management, financial markets & institutions, and
macroeconomics at the Faculty of Business and Accountancy, University of Malaya, Malaysia.
ORCID
Md Aslam Mia http://orcid.org/0000-0002-6452-1126
Hwok-Aun Lee http://orcid.org/0000-0003-4513-5235
VGR Chandran http://orcid.org/0000-0002-4219-9252
Rajah Rasiah http://orcid.org/0000-0002-6654-3011
Mahfuzur Rahman http://orcid.org/0000-0003-2072-5829
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Business History

2019, VoL. 61, no. 4, 703–733

History of microfinance in Bangladesh: A life cycle theory

CONTACT Md Aslam Mia mdaslam.mia@siswa.um.edu.my

2.2. Microfinance: distinctions and shortcoming

Table 1. Summary of financial products offered by MFIs.

Afganistan Bangladesh India Nepal Pakistan Srilanka

Stage-1 Stage-2 Stage-3 Stage-4 Stage-5

Figure 2. Stages of development of microfinance in Bangladesh (1976–2015). Source: Authors’ adaptation

the 1980s witnessed a growing number of non-governmental organizations (NGOs) experiment-

4. Phases of microfinance development

4.1. Stage1 (1976–1985): experimentation and introduction

4.2. Stage 2 (1986–1995): growth and expansion

4.3. Stage 3 (1996–2005): maturity

share of operations of commercial banks and tends to be targeted at small-scale operatives

4.4. Stage 4 (2006–2015): saturation

Individual and Households Multiple Borrowing Rates

Individual overlapping Households overlapping

Figure 6. Multiple membership in Bangladesh Microfinance sector (2002–2009). Source: Authors’

2010 Average savings

4.5. Stage 5 (since 2016): decline?

While we attempted to provide a comprehensive account of microfinance in Bangladesh,

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