The Palli Karma-Sahayak Foundation (PKSF) as a Regulator of Microfinance Institutions in Bangladesh
Squillance, Sharon
2004
- Submitted in partial fulfillment of the degree Master of Arts in Law and Diplomacy at the Fletcher School of Law and Diplomacy. Abstract: Over the last two decades, microfinance has become a popular vehicle for poverty reduction and economic development in Bangladesh. As the microfinance industry continues to experience high growth rates, and as concern about the need to protect the poor engaged ... read morein microfinance activities increases, the question of whether and how to regulate and supervise microfinance institutions (MFIs) also grows in importance. On May 2, 1990, the Government of Bangladesh (GOB) established the Palli Karma-Sahayak Foundation (PKSF) as a not-for-profit financial apex organization. As an apex organization, PKSF's purpose is twofold: (1) to perform financial intermediation through the distribution of collateral-free loans with concessional rates of interest, financed by development banks and international donor agencies, to its partner organizations (POs) that perform grassroots microcredit operations and (2) to develop sustainable microcredit institutions. PKSF has several characteristics that are thought to render it a good candidate as regulator. In Bangladesh, where access to credit is scarce and donor funds are decreasing, MFIs are obligated to comply with PKSF's strict reporting and performance standards to receive its credit. PKSF also has extensive experience appraising, monitoring and supervising diverse MFIs. PKSF has a highly qualified, professional staff that is trained in microfinance. In addition, PKSF's mission statement is encourages MFI product and process innovations and the expansion of new products. Finally, PKSF places great emphasis on building institutional development in order to strengthen its own capacity as an apex funding institution and the capacity of its POs, which promotes the sustainability of the industry. However, there are some financial and non-financial costs that must be considered as part of this discussion. The administrative costs of registering all MFIs under one roof could force closure of MFIs and raise interest rates, hurting more of the poor who depend on their services. PKSF also may not be an effective regulator for local MFIs that do not receive or depend upon funds from PKSF or donor organizations for its operations. On the other hand, the legitimacy and promotional benefits that would accrue to small locally funded MFIs may be great enough to attract funds and increase outreach to offset these initial costs. If PKSF compliance standards can serve as a benchmark for the financial health of deposit-taking MFIs, like a credit report, confidence in the sector would be expected to increase, thereby attracting more depositors and investors than there would have been if regulation reform had not occurred. Further research and investigation into quantifying the size and weighing the potential costs and benefits of regulation reform should be considered to determine the best course for implementation.read less
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