Subsequently in the light of the above recommendations Bangladesh Bank and other stakeholders also raised the issue of regulation for this sector to the government. In this circumstance, the government formed a Committee of seven members with the chairmanship of the Governor of Bangladesh Bank in October 1999 to a) recommend an effective credit and savings policy for this sector, b) ensure transparency and accountability into their activities and c) make some recommendations regarding a regulatory framework and to propose a body to regulate and supervise these institutions.
The Committee submitted its report in March 2000, the major recommendations consist of formulating the following policies and actions;
- Policy to remove overlapping problem,
- Policy regarding establishment of linkage between NGOs and formal financial sector to solve NGOs' funding problem,
- Policy for loan classification, provisioning, interest rate, reserve requirement against savings/ deposit, and investment of savings/ deposits,
- Legal basis to recover default loan,
- Proper definition of member and non-member,
- Policy for uniform accounting standard, internal and external audit,
- Fix up the upper limit of administrative expenses of NGOs,
- Formulation of a prudential guideline for the microfinance sector,
- Formulation of performance standard to monitor and rating NGO-MFIs,
- Creation of a separate regulatory body or a subsidiary organization of
On the basis of the above recommendations there was a meeting in Ministry of Finance on May 28, 2000 under the chairmanship of the then Finance Minister. According to the decision of that meeting a Unit namely "Microfinance Research and Reference Unit (MRRU)" was established in Bangladesh Bank under the supervision of a National Steering Committee formed through a government order on June 18, 2000. The Governor of the Bangladesh Bank headed this Committee and it consisted of 10 other members from, ministry of finance, social welfare ministry, NGO Affairs Bureau, PKSF, Grameen Bank, ADAB, BRAC, and others. Members were selected from both government and private sectors. Terms of References (TORs) of the Committee were as follows;
- Formulation of policy guidelines to regulate the NGO-Micro-Finance Institutions (NGO-MFIs) and setting performance standard to ensure their qualitative improvement.
- Preparation of uniform accounting guidelines for MFIs to ensure their transparency and accountability.
- Monitoring the activities of the MFIs in compliance of the policy guidelines prepare by the Steering Committee.
- Recommendations for preparing a legal framework in support of the Micro-finance Research and Reference Unit or a new regulatory authority for the MFIs.
The Steering Committee was given three years time to complete its work under the above TORs. Accordingly, by June 2003 the Committee completed following works with the help of a technical committee headed by the then, Managing Director of PKSF;
- Prepared a financial guideline, TOR of external and internal auditor to ensure financial transparency and accountability,
- Prepared a guideline to assess the performance of NGO-MFIs,
- Prepared some formats for collecting information from NGO-MFIs for developing Management Information System that would help monitoring the activities of the MFIs.
However, the Committee could not prepare a legal framework of a regulatory body to act as the regulatory authority for the micro-finance institutions (TOR (d) above) because of time constraint. The Committee submitted its report to the Government in June 2003; major recommendations were as follows:
- MFIs should not be permitted to accept deposits from the non-member/ general public.
- Steps should be taken for implementation of the guidelines, format, prepared by the Committee to ensure use of best practices by the MFIs.
- The above steps should to be taken immediately, for which a regulatory body is necessary. Until such a legal regulatory authority is constituted the government may consider giving authority to this Committee/ the Unit to implement the recommended guidelines as an interim arrangement.
- The Committee will prepare a legal framework for the regulatory body to act as a regulatory authority in the second term if the government permits.
- The government may extend the time of the Committee for two more years to formulate a regulatory framework.
The government accepted those recommendations and extended the time of the committee for two more years. Steps taken by the Steering Committee/ the Unit in the second term were as follows.
- A separate office was established in Bangladesh Bank for the Unit to implement Committee's guidelines. Initial technical and financial supports in establishing a separate office were given by the Bangladesh Bank and the Palli Karma-Sahayak Foundation (PKSF).
- A public notice was published on daily newspapers regarding prohibition of deposit collection from non-members without having formal licenses to do so.
- Published an operational guideline on the basis of recommendations given the Steering Committee for monitoring management and financial system of microfinance institutions. It contains reporting formats, guideline for measuring performance and an accounting procedure as well as terms of reference for internal and external audit.
- Based on that guideline MRRU requested NGO-MFIs to provide quarterly information since January 2004 to the Unit. The Unit has published two analytical reports on NGO-MFIs in Bangladesh based on the information provided by the NGOs.
- The Unit provided training to NGO-MFIs on the operational guideline.
Proposal for Special Enactment for a Regulatory Authority
The Steering Committee has prepared a draft law for setting up a separate regulatory authority for this sector and submitted it to the government for taking necessary action. Two renowned lawyers and a few microfinance specialists were involved in the process of drafting the law. Before submitting the final draft to the government, the Committee discussed the important contents of the draft with the representatives of NGO-MFIs in a workshop held in December 2004. A number of relevant recommendations from this workshop were taken into account during finalizing the draft law for a separate regulatory body. The draft law suggested for an independent regulatory authority that would be responsible for providing license to the MFIs and monitoring their activities.
The new law passed by the Government
The government passed the law, ' Microcredit Regulatory Authority Act 2006' in July 2006 on the basis of the suggestions given by the Committee. Under this law the government has established a separate Microcredit regulatory Authority (MRA) and constituted its board of directors with the governor of the Bangladesh Bank as the chairperson. According to this new law all active MFIs will have to apply for license from the Authority. No MFIs will be allowed to work within the country without having license from the Authority. According to the Law all institutions who have microcredit operation should separate their financial operations from other development works and keep their accounts separate. The Authority has been given power to monitor and supervise all these MFIs who will get license from it. The Authority also has the power to prepare detail rules related to the operations of microcredit including conditions for spending any income, area of operations, guideline of internal and external audit and accounts, collection of deposits, and use of earned profit, governance structure of MFIs, reporting requirements etc. The Authority has the mandate to take punitive measures if any institution does not comply with any of the provisions of law and rules.
Establishment of MRA
To bring Non-government Microfinance Institutions (NGO-MFIs) under a regulatory framework, the government of Bangladesh enacted "Microcredit Regulatory Authority Act, 2006" (Act no. 32 of 2006) on July 2006 with effective from August 27, 2006. Under this Act, the government established Microcredit Regulatory Authority (MRA) with a view to ensuring transparency and accountability of microcredit activities of the NGO-MFIs in the country. The Authority is empowered and responsible to implement the said act and to bring the microcredit sector of the country under a full-fledged regulatory framework.