New microcredit bank in the offing, to operate on social business model

Highlights:

• Interim government proposes Microcredit Bank based on Yunus's social business model
• Borrowers will hold majority ownership; bank bypasses conventional banking regulations
• Microcredit Regulatory Authority, not central bank, will supervise new institution
• Profits capped at initial investment; surplus reinvested under social business principles
• Bank to offer venture capital, assets, advisory services, and savings facilities
• Experts warn of overlap, competition, and political risks before national elections

The interim government has moved to institutionalise the "social business" model championed by Chief Adviser Muhammad Yunus, unveiling a draft ordinance to establish a specialised "Microcredit Bank".

Designed to bypass conventional banking hurdles, the proposed institution aims to finance small-scale and emerging entrepreneurs through a unique structure where borrowers hold a majority stake. The bank will operate largely outside the regulatory reach of the Bangladesh Bank.

Infograph: TBS

A new regulatory frontier

The Financial Institutions Division of the finance ministry published the draft ordinance on the proposed microcredit bank on its website this week, inviting stakeholder feedback. According to the proposal, the Microcredit Regulatory Authority (MRA), rather than the central bank, will serve as the sole licensing and supervisory body.

Furthermore, the bank will be exempt from the Bank Company Act regarding liquidation and other standard banking regulations, marking a significant departure from the country's traditional financial framework.

Guided by social business principles

The initiative follows a directive from Chief Adviser Muhammad Yunus, who recently emphasised that the institution must function on "trust and confidence" rather than collateral.

Zahid Hussain, former Lead Economist at the World Bank's Dhaka office and a member of the banking reform task force, noted that the ordinance provides the first formal legal framework for social business in Bangladesh's financial sector.

"The core concept is that capital providers cannot take profits exceeding their initial investment," he explained. "Any surplus must be reinvested. This creates an alternative to the corporate, profit-maximising models that currently dominate the sector."

Operational scope and capital 

The draft outlines a versatile mandate for the Microcredit Bank, allowing it to:

• Provide venture capital: Invest in the establishment and expansion of small businesses.
• Supply physical assets: Provide industrial and agricultural machinery, livestock, and raw materials via credit.
• Offer holistic support: Provide technical, administrative, and marketing advice, alongside insurance facilities for borrowers.
• Manage savings: Collect deposits from both borrowers and the general public.

The bank will launch with an authorised capital of Tk300 crore, divided into shares with a face value of Tk100. The initial paid-up capital is set at Tk100 crore. A seven-member board will oversee operations, featuring three directors elected by borrower-shareholders and three by other shareholders.

Concerns

However, Towfiqul Islam Khan, additional director (research) at the Centre for Policy Dialogue (CPD), expressed reservations. He pointed out that many activities planned for the new bank are already being carried out by existing Microcredit Regulatory Authority-licensed microcredit financial institutions, such as Grameen Bank.

He suggested that instead of establishing a new bank, the focus should be on strengthening the Microcredit Regulatory Authority to gradually expand the services offered by existing institutions.

Towfiqul also raised concerns about the impact of a new bank on the current economic situation, predicting it could create extreme competition in the market. Given the upcoming national election, he added that obtaining consent from political parties before operationalising the new bank would be prudent.

Microcredit landscape

According to the report published by the Microcredit Regulatory Authority last June, 724 licensed microcredit financial institutes are serving 4.16 crore members, including 3.22 crore borrowers, which have significantly contributed to financial inclusion. These institutions, with over 2.23 lakh employees and 26,071 branches, have become an economic hub for providing employment and financial services, especially to marginalised people across the country.

In June 2024, the total loan outstanding and savings of these institutions were Tk1,59,410 crore and Tk68,591 crore, respectively. In the fiscal 2023-24, their total loan disbursement was Tk2,61,524 crore, of which about 50% was in the agricultural sector for the marginal level.

In the message provided in that report, Bangladesh Bank Governor Ahsan H Mansur stated that in FY2024, government and non-government banks contributed to microfinance with 5.6 lakh members and 4 lakh borrowers. They managed Tk8,685 crore in loans, Tk1,868 crore in savings, and Tk5,802 crore in disbursements.