From Social Movement to Banking Risk: Why Bangladesh Must Reject the Microcredit Bank Proposal

Bangladesh’s microcredit sector is not merely a financial system; it is the outcome of decades of social struggle, institutional innovation, and an integrated development philosophy that combines finance with health, education, disaster response, and livelihood support. Yet, the draft ordinance published by the Financial Inclusion Division of the Ministry of Finance on 15 December 2025—proposing the establishment of Microcredit Banks (MCBs)—threatens to undermine this ecosystem fundamentally.

Allowing barely one month for public opinion, while ignoring nearly 700 licensed MFIs, 40 million client families, half a million employees, and a deeply rooted “microfinance-plus” model, reflects a dangerously hurried and poorly grounded policy move. If enacted, this proposal risks mission drift, uneven competition, regulatory conflict, and the possible extinction of small and medium NGO-based MFIs—ultimately weakening Bangladesh’s civil society and long-term development gains.

Below are nine fundamental reasons why the proposed Microcredit Bank framework must be opposed.

1. No Urgency Justifies Excluding Stakeholders

The government has allowed public feedback on the draft MCB ordinance only until 15 January 2026—an unreasonably short window for a reform that could reshape one of the country’s most vital social sectors. Bangladesh has around 700 MFIs licensed by the Microcredit Regulatory Authority (MRA), chaired by the Governor of Bangladesh Bank. While large MFIs dominate loan volume, it is small and medium MFIs that operate in remote, climate-vulnerable, and underserved regions.

These MFIs deliver not only credit but also health services, education, disaster response, and livelihood support under an integrated development model. They are regulated both by the MRA and the NGO Affairs Bureau, and the MRA itself encourages social development, allowing up to 20 percent of surplus for such activities. Introducing a banking framework without broad, structured consultation shows a clear disregard for sector realities and decades of institutional learning.

2. Converting MFIs into Banks Will Cause Mission Drift

Microfinance in Bangladesh was born as a development intervention, not a banking product. Forcing MFIs into a bank-centric model will inevitably undermine “microfinance-plus” activities that address poverty’s multidimensional nature.

World Bank data show that roughly 40 percent of Bangladesh’s population still lives under or near the poverty line, increasingly exposed to climate shocks—both slow-onset (heat stress, cold waves) and rapid-onset disasters (floods and cyclones). Poverty today is about vulnerability and resilience, not income alone. A banking model driven by balance sheets, capital adequacy, and profit discipline will prioritize financial indicators over social outcomes, hollowing out the original purpose of microfinance.

3. The Post-2026 Context Makes the Proposal More Dangerous

Bangladesh’s microfinance sector serves nearly 40 million families and employs around 500,000 people. Outstanding loans total about USD 13 billion, while member savings stand at USD 5 billion—around 43 percent of the loan portfolio. Bank borrowing accounts for roughly 18 percent, and PKSF about 7 percent.

As Bangladesh moves toward middle-income status after 2026, foreign aid to NGOs is rapidly declining. For over two decades, external donations to microfinance have already been negligible. Today, MFI surpluses fund critical “plus” activities—technical training, entrepreneurship development, vocational education, agro-value chains, and skills support for rural–urban migration.

A shift to Microcredit Banks will squeeze out these investments, as banking regulations and profit expectations crowd out socially oriented spending. At a time of shrinking aid, dismantling this self-financed development model would be strategically reckless.

4. The Proposal Ignores the Sector’s Real Problems

From a practitioner’s perspective, the sector’s key challenges are well known:

• Borrower duplication and overlapping
• Rising staff misappropriation
• Increasing default and overdue trends
• Lack of subsidized wholesale capital for small and medium MFIs
• Complex and prolonged RJSC registration processes

The MRA has introduced promising tools like the Credit Information Bureau (CIB) and Staff Information Bureau (SIB), but implementation remains slow. Staff misappropriation now costs MFIs an estimated 1–2 percent of capital annually, while legal remedies are lengthy and ineffective.

PKSF remains the only meaningful source of subsidized wholesale funds, yet its capital base is limited and government support is declining. Commercial bank loans come with high interest, hidden charges, collateral demands, and restrictive conditions. RJSC registration as a nonprofit is slow, costly, and opaque.

None of these structural problems are addressed by creating Microcredit Banks.

5. Microcredit Banks Will Create Unequal and Unfair Competition

The draft ordinance grants MCBs powers that MFIs do not enjoy:

• Authority under the Public Demands Recovery Act 1931 to file certificate cases against borrowers
• Legal rights to take collateral through pledge, hypothecation, and assignment
• Permission to conduct unrestricted retail banking with non-members
• De facto dual regulation, as any institution called a “bank” must be licensed by Bangladesh Bank, weakening the MRA’s authority
• A governance model that undervalues visionary leadership, despite Bangladesh’s experience showing that institutions like BRAC and ASA were built by strong, mission-driven leaders

These privileges will tilt the playing field decisively against NGO MFIs, especially smaller ones, accelerating concentration and institutional collapse.

6. Global Experience with Microfinance Banks Is Largely Negative

Internationally, microfinance banks have often led to the marginalization or destruction of NGO MFIs. Founders have been pushed out, borrower ownership diluted, and small institutions wiped out.

The experience of CARD Bank in the Philippines—where borrowers were nominal shareholders—shows how larger investors gradually captured control, sidelining both borrowers and social objectives. Bangladesh should learn from these failures rather than replicate them.

7. Borrower Majority Ownership Is Conceptually Unclear

Clause 8.1 of the draft ordinance proposes that borrowers will hold 60 percent of shares. Yet it remains unclear whether MCBs will operate as retail lenders or wholesale institutions like PKSF, or how borrower-shareholders will meaningfully exercise control.

The proposal also invokes “social business,” where surplus is reinvested rather than distributed. How this reinvestment will occur, how profits will be allocated, and how accountability will be ensured are left undefined—raising serious governance concerns.

8. Turning NGOs into “Banks” Weakens Civil Society

If enacted, at least 100 NGO MFIs may seek bank status to access stronger recovery powers and unrestricted deposit mobilization. Most will retain parallel NGO entities for social work, creating costly and inefficient dual structures.

More critically, rebranding MFIs as banks will severely limit access to international funding for education, health, training, and disaster response. NGO MFIs must remain part of srights, accountability, and democratic space.

9. Reform Existing Banks—Do Not Create New Ones
10. Bangladesh already has 62 banks, including 43 private banks. Four have recently been rescued with public funds amounting to BDT 20,000 crore. Many non-bank financial institutions are distressed, with non-performing loans exceeding 50 percent.

By contrast, Thailand has 18 banks, Malaysia eight, Singapore five. The solution is not more banks, but fewer, stronger ones. Bangladesh should open specialized, subsidized wholesale lending windows within existing banks for NGO MFIs—rather than launching risky new banking entities.

Conclusion

The proposed Microcredit Bank framework does not solve the problems of Bangladesh’s microcredit sector—it creates new ones. It threatens mission drift, uneven competition, regulatory confusion, institutional collapse, and the erosion of civil society space. What the sector urgently needs is reform, protection, and targeted support—not a hurried and ill-conceived banking experiment.

Rezaul Karim Chowdhury, Executive Director of COAST Foundation