Govt moves to review, cut microcredit service charge

The government has initiated a move to reduce the current 24 per cent service charge applied by microfinance institutions (MFIs) in a bid to make microcredit more affordable for low-income borrowers, especially those at the bottom of the economic pyramid.

To this end, the Microcredit Regulatory Authority (MRA) has formed a high-powered nine-member committee, headed by Dhaka University professor M Jahangir Alam Chowdhury, to prepare recommendations for a rationalised service charge.

An additional representative from the Financial Institutions Division (FID) will also be included. The decision to form the committee was taken at the MRA's 76th board meeting, and the panel list has recently been submitted to the FID.

The MRA, the regulatory body overseeing MFIs in the country, is mandated to review microcredit service charges every two years.

The current 24 per cent ceiling, which is a service charge and not an interest rate, was last revised from 27 per cent in 2019. The cap was originally introduced in 2010 when the authority first fixed the maximum rate at 27 per cent.

A source involved in the review process said that although there is pressure to reduce rates, the rising operational costs amid high inflation make a reduction challenging. Any cut in the service charge under current conditions may hurt the sector.

However, some MFI insiders are advocating for a flat service rate, proposing a range between 12 per cent and 13.5 per cent for small loans, significantly lower than the existing rate.

This is not the first time the government has explored the issue. In 2022, the MRA formed an 11-member committee headed by Grameen Bank Chairman Prof Dr AKM Saiful Majid to explore the possibility of slashing the rate.

That committee later formed a technical sub-committee to assess whether there was room to lower the cost of MFI services. In 2023, the technical team concluded that the 24 per cent rate should remain unchanged.

The issue has been reviewed multiple times in recent years without a final decision. In 2021, the MRA formed a 10-member committee led by its then executive vice-chairman to propose revisions, but it was later dissolved without making any recommendations.

A follow-up technical committee, headed by MRA Director Mohammad Yakub Hossain, was also disbanded without results.

An official from the Financial Institutions Division confirmed that rationalising microcredit service charges remains under active consideration, despite pushback from MFIs. "MFIs have long opposed lowering the rate, arguing that it would threaten their sustainability," he said.

Experts, however, have repeatedly called the existing rates "excessive" for poor borrowers, undermining the very purpose of microfinance. They argue that without a fair and transparent pricing mechanism, the poor will remain trapped in a cycle of debt.

The MRA was established under the Microcredit Regulatory Authority Act 2006 to regulate the microfinance sector and promote its sustainable development. As of the latest MRA data, 693 licensed MFIs are currently operating across the country.

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