ADB provides $200m to strengthen microfinance

The Asian Development Bank (ADB) and the government of Bangladesh on Tuesday signed an agreement for $200 million in loan to strengthen microfinance in Bangladesh, supporting microenterprises, particularly those owned by women and those located in regions with high climate risks.

Secretary of Economic Relations Division (ERD) Sharifa Khan and Country Director of ADB Edimon Ginting signed the agreement on behalf of their respective sides, said an ADB press release.

The Microenterprise Financing and Credit Enhancement Project will increase the liquidity of microfinance institutions (MFIs), which are key lenders to microenterprises, by channelling funds through the Palli Karma Sahayak Foundation (PKSF). PKSF is a state-owned microfinance and development organization that lends to partner MFIs.

“Microenterprises are effective tools to generate employment, cut rural poverty, and reduce urban-rural economic disparities,” said ADB Country Director.

“Strengthening microfinance is critical for socio-economic recovery from the COVID-19 pandemic and revitalizing the economy,” Ginting added.

The ADB country director also said this initiative builds on previous ADB support to PKSF to further boost available funding for MFIs as well as encourage commercial bank funding by reducing perceived credit risks.

The project targets that at least 80 per cent of microenterprise borrowers be owned or led by women. The project will develop a business plan update and digitalisation roadmap for PKSF as well as a diagnostic review of its partner MFIs’ operational costs to enhance their viabilities.

Eligible MFIs to receive financing through PKSF will dedicate at least 10 per cent of their lending portfolio to microenterprises coming from regions facing adverse climate risks, such as floods, cyclones, and drought.

To encourage commercial bank funding, the project will help pilot a credit guarantee fund at PKSF that will cover the credit risk for small and medium-sized MFIs. This complements ADB’s ongoing Microfinance Risk Participation and Guarantee Program under its private sector operations. Due to small-sized operations, lack of collateral, and weak operational capacity and information systems, MFIs find it difficult to secure commercial bank financing to on-lend to microenterprises.

A technical assistance (TA) amounting to $1 million will help develop the credit guarantee fund as well as partner MFIs’ capacity to enhance women’s entrepreneurship skills. The TA will help promote environmentally responsible microenterprise financing through advisory services for those affected by climate risks.