POVERTY: Bangladesh caps microcredit interest rates

11/9/2010
Microfinance lending pioneer Bangladesh plans to cap the industry's interest rates amid criticism that for-profit groups are demanding excessive payments from poor borrowers, an official said Tuesday.
Muhammad Yunus, who created the microfinance concept and built up specialist lender Grameen Bank, won a Nobel prize for his work but the sector has since grown into an unregulated, multi-billion-dollar commercial industry.
The government's Microcredit Regulatory Authority (MRA) has approved new rules banning microfinance lenders from charging more than 27 percent interest on loans, MRA director Sazzad Hossain said.
"Many microlenders have earned a bad name for charging high interest rates. There are also isolated incidents in which lenders have used force to compel borrowers to repay loans," Hossain told AFP.
One out of every five of Bangladesh's 146 million citizens is a micro-credit borrower, relying on one of more than 1,200 micro-finance institutions whose interest rates vary from 20 percent to 51 percent, according to the MRA.
"We oppose the interest rate cap. It will be hard for micro-lenders to stay afloat charging just 27 percent interest," said Mosharraf Hossain, head of the Credit Development Forum, a microfinance industry association.
Hossain said local microfinance institutions have high costs as many borrow money from private banks at around 13 percent interest, then lend the money on, adding that there are extra costs when operating in remote, rural areas.
"We also write off huge amount of loans during natural disasters such as cyclones, floods," he said, warning that if the sector collapsed due to caps on interest rates, it would hit the poor hardest.
The MRA move comes after India's Andhra Pradesh state, the hub of Indian small loan activity, cracked down on microfinanciers following accusations that high interest rates and aggressive debt collectors had led to over 30 suicides.
Bangladesh's new regulations, to come into force in July 2011, also ban unofficial deductions by lenders for so-called saving schemes, limit charges for administration fees and set a 15-day mandatory grace period for repayment.
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