ADB Supports Microenterprise Financing in Bangladesh

The Asian Development Bank has approved a $200 million loan to strengthen microfinance in Bangladesh, supporting microenterprises, particularly those owned by women and those located in regions with high climate risks.

The Microenterprise Financing and Credit Enhancement Project will increase the liquidity of microfinance institutions (MFIs), which are key lenders to microenterprises, by channeling funds through Palli Karma Sahayak Foundation (PKSF).

PKSF is a state-owned microfinance and development organization that onlends to partner MFIs, according to a press release of ADB received from Manila.

“Poverty in Bangladesh has declined significantly in the last decade, but employment opportunities remain limited in rural areas. Microfinance is one way to enable microenterprises to grow and generate rural employment,” said ADB Senior Financial Sector Specialist for South Asia Manohari Gunawardhena.

“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.”

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 onlend to microenterprises.

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

The project also targets that at least 80% of microenterprise borrowers be owned or led by women.

The project will develop a business plan update and digitalization road map for PKSF as well as a diagnostic review of its partner MFIs’ operational costs to enhance their viabilities. 

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 Program under its private sector operations, which targets larger MFIs.

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.

This new project builds on the success of the $50 million Microenterprise Development Project that was approved in 2018 and received additional $50 million financing in 2020 to support microenterprises affected by the COVID-19 pandemic. More than 90% of the supplementary funding has been disbursed as subloans to 94 MFIs as of June 2021.