The Financial Express

Reduction in service charge for microfinance institutions uncertain

| Updated: September 20, 2021 11:20:43

File photo used for representational purpose. (Collected) File photo used for representational purpose. (Collected)

A government move to cut service charge for microcredit operations remains stuck in limbo, especially for non-cooperation from the sector.

Seven months ago, the regulator initiated to slash the current 24-per cent interest rate or service charge, as imposed by micro-finance institutions (MFIs), to give poor borrowers some relief.

The Microcredit Regulatory Authority (MRA) formed a 10-member committee to revise the existing rate.

MRA executive vice-chairman is the head of the committee while representatives from the central bank, finance ministry, Credit and Development Forum (CDF), and Palli Karma-Sahayak Foundation sit on it.

But the committee has held only one meeting since then.

Later, the MRA formed another technical committee, led by MRA director Mohammad Yakub Hossain, to assess the potential service charge for microcredit operations.

It has been two months since the technical committee could not hold a meeting.

In 2019, the regulator fixed the maximum interest rate for microloans at 24 per cent after almost nine years.

It capped the interest rate at 27 per cent for the first time in 2010.

Mr Hossain told the FE that Covid-19 was the reason for this delay.

Rationalising microcredit service charge is under the government's active consideration, he says.

But, according to sources, the MFIs are strongly opposing the move to reduce service charge.

Murshed Alam Sarkar, chairman of CDF, an association of MFIs, earlier told the FE that they were opposing any decision to cut service charge.

"MFIs are already in a crisis due to the pandemic. So, any move to cut their service charge will affect micro-lenders," he said.

BURO director (finance) Md Mosharraf Hossain said the cost of microcredit operations is much higher than that of commercial banks.

"Those who are trying to reduce service charge are comparing with the banking sector's interest rates. These two aren't the same," he told FE.

The previous committee in 2019 recommended reviewing interest rate as per the declining balance method after two years.

Experts on different occasions have said interest rate or service charge of the MFIs is too high.

It is crucial to cut charges to help alleviate poverty and ensure economic growth, they added.

According to the experts, the existing microcredit service charge is intolerable for poor borrowers.

The government established the MRA under the Microcredit Regulatory Authority Act-2006 to monitor microfinance operations at home and promote sustainable growth of the sector.

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