Eighth Five Year Lending forecast is based on the lending projection
for 1995 roughly estimated at Nu. 39.25 million. The growth rate is
assumed on the above rates on cumulative basis.
In view of the smallness of the loan, difficult
terrain and scattered settlements, the cost of both providing and
obtaining credits are high.
The low rate of recovery have been one of the major
problems encountered ever since the inception of BDFC. Although the
recovery rate have been increasing gradually over the years, BDFC
need to further work towards achieving a higher rate. The present
rate of recovery is 77.33% and is low in terms of international
The density of population is quite low which is about
13 persons per square kilometers on an average in Bhutan and makes it
difficult for an institution like BDFC to operate Microfinance.
In the rural areas, the lack of motorable roads and
regular transport facilities have also acted adversely in farmers
taking active part in the Microfinance programs.
Lace of market for the local produce which not only
reduces the demand for credit, but also contributes to their failure
in meeting loan repayments.
majority of the farmers are illiterate and has to also do with the
level of development in the country.
Microfinance loan repayments are made on longer term basis as they do
not have the ability and capacity to pay back faster. This
arrangement impede quick recycling of available funds and higher
have been fortunate until now for not facing any fund crunch as the
RGoB and donors and have been able to provide financial resources
that it required. But the situation is changing with the donor
agencies coming up with stringent rules, and the demand for new
credits increasing over the years.
level of the interest earnings of the portfolio does not cover up
actual overhead costs of administering and managing the Microfinance
programme without the subsidies (grants & soft term loan fund)
and the operating costs escalate every year.
are also informal and semi-formal lending institutions providing
various sorts of financial facilities and services in the country.
While informal arrangements for financial and credit
services do exist in some parts of the country, there are very little
or no data of such facilities and related arrangements documented
anywhere. What used to be prevalent in earlier years mostly, prior to
the monetization of the Bhutanese economy, not too long ago, the well
to do families or person(s) would loan out resources cash or grain or
both to the poorer fellow villagers to resolve their seasonal or
emergent difficulties. The terms of such lending/borrowing were
believed to be usually between 15% to 25% and repayable within one
year period. Loans taken in kind had to be repaid with interest in
It is believed that most villages had one or more
such informal lenders, who in some cases may be the more enterprising
individual(s) of the community. The most common one in the urban
centres with development being the personal loans from people who can
afford to roll the money for a fixed monthly interest ranging from 5%
to 10% per month.
The monastic institutions who had substantial revenue
collections of its own had the practice of lending money, grains, and
diary produces to certain creditworthy individuals or families. The
rate of interest ranges between 15% to 25% per annum. Such lending by
the monastic institutions or centers could be treated as the informal
type of financial and credit arrangements.
The National Women Association of Bhutan (BWAB), a
non governmental organization in collaboration with BNB has initiated
a special credit scheme to cater to the women's requirement in
Trashigang District between 1989 to 1991. The operation finally took
shape in 1993. The mechanism used to guarantee the repayment of these
loans is through peer pressure where people within each credit group
ensure that no one defaults on the repayment. The scheme is mainly
targeted to the women clients and is on a very small scale.
Another scheme called "National Fodder Seed
Production Centre" was also initiated by Helvetas at Bumthang to
cater the agriculture-input requirements of the farmers in the
beginning of 1990. The operation was later handed over to the BDFC in
1994 in view of the logistics problem.
In general, with the increasing popularity and access
to credit services provided through the formal financial services,
reliance on the informal financial services is on the decline both in
urban and rural areas.
Although the financial institutions have been
extending liberal credit facilities and services nation-wide,
especially through the Microfinance programme by BDFC, the coverage
is yet limited.
This situation have been made evident from the MIS
report of BDFC which revealed that the number of active clients as of
December 31, 2001 stood at 11,061 against the estimated 65,000 rural
households (Credit Demand Assessment Report, M/s, Kyingkhor Constancy
Firm 2000) which does not cover even 16% of the estimated population
on the assumption that only one loan is given per household. This
leaves an enormous scope to widen rural lending activities in the
years to come.
The main constraints that contributed to this limited
coverage and access to the rural credit services of the BDFC
initiated programme can be classified as that pertaining to the rural
client's own individual limitations (luck or natural being),
viability, needed physical infrastructure, market and the other to a
certain degree enforced by the financial institutions involved in the
delivery of the credit and the overall situation of the country.
Lack of Entrepreneurship leading to farmers getting
automatically excluded from participating in the credit programme;
Low literacy, which disable them from taking advantage of
credit services and also making productive investments;
Remoteness of villages from the motorable road head which puts
them to big disadvantages;
Lack of markets for the local produces which not only reduces
the demand for credit, but also contributes to their failure in
meeting loan repayment;
Lack of investment opportunities in rural areas, which limit
the credit absorptive capacity of individual rural clients.
BDFC which is the only formal institution operating micro-finance in
rural areas of Bhutan is faced with difficulties to sustain its
operation with the existing terms, conditions, and modality of
attempting to re-address the problems of BDFC by widening the access
of its micro-finance services would necessitate the Corporation to
streamline its existing delivery mechanism and promote a more
Microfinance programme have made significant difference in improving
the income and quality of life of the rural farmers, directly or
indirectly. Extension of credit facilities have not only enabled
rural people to be more receptive to new technologies, improved
practices of farming, utilization of new seeds/seedlings or plants,
and applications of fertilizers and plant protection chemicals, but also made it possible for them to actually
obtain and use the various new extension packages developed or
improved varieties being promoted by organizations like Ministry of
effective credit facilities, efforts made by researchers, extension
agents and district authorities would make little difference, as most
farmers would not be able to afford to obtain seeds/plants of the
promoted varieties, besides appreciating the potentials of what could
have been achieved. It is the credit component that plays catalytic
role to harness the benefits of proven research results and properly
developed extension packages.
access of rural farmers to credit would enhance the productivity and
income level, which in turn could generate the resources to be saved.
The increased credit facilities would generate additional income,
which would lead to increase in potentials for savings, and savings
could ensure better creditworthiness of clients to obtain more or
bigger loans and permit capital formation for financing larger
Few recent ideas have generated as much hope for
alleviating poverty in low-income countries as the idea of
microfinance. Microfinance promises both to combat poverty and to
develop the institutional capacity of financial systems through
finding ways to cost-effectively lend money to poor households.
Success stories are being written around the world, from Jakarta to
Dhaka to Nairobi to La paz.
The Microfinance movement has brought together credit
programs that successfully lend to poor households. Through high
profile events such as Micro Credit Summits, the public perception is
that Microfinance programs are the success story of development
finance. Although this is far from the whole truth, as critical
analysis has revealed, it is nonetheless legitimate to say that some
successful Microfinance institutions have emerged over the last
decade. They are few in number, admittedly, but their achievements
have been all the more spectacular for that. Examples include
Bancosol, Caja Los Andes, Financiera Calpia or BRI, whose credit
technology deserves to be regarded as best practice and is
characterized by the following elements.
Loan analysis focuses sharply on the prospective clients ability to
pay ( cash flow),less emphasis is placed on collateral. The
analysis is highly standardized and loan processing times are
The graduation principle is applied to repeat borrowers.
Loan officers bear full responsibility throughout the entire life of
the loan and are paid performance based salaries.
Appropriate decision-making and control mechanisms are in place,
supported by a powerful MIS/TT which assists in the management and
administration of the loan portfolio.
While there is much common ground, two camps have
emerged within the movement. On the one hand are the institutionalist, who see
microfinance as a way to expand financial systems to serve the
under-served. The welfarist
camp, on the other hand, sees microfinance as a way to effect
meaningful changes in the lives of clients. Many of whom have been
hard to reach through traditional social
welfare programs. The institutionalist have argued strongly
for lending without recourse to subsidies in order to expand the
scale of operations, while the welfarists have argued that
eliminating subsidies will eliminate important aspects of the
The institutionalist camp centers on the development
of financial institutions, with the scale of operations privileged
over impact on poor households. Their aim is to begin filling gaping
holes in financial systems. In many of the countries where
microfinance is taking root, one quarter or less
of economically-active populations are served by formal-
sector banks, leaving the majority of the population to fend in the
informal sector. For this camp, the most commonly-cited model
programs are the "unit"program of the Bank Rakyat Indonesia (BRI),
serving over 16 million low-income households in Indonesia, and Latin
American affiliates of ACCION Intontional notable Banco Sol, which
now serves over one third of the clients of the Bolivian banking
system. The institutionalist camp has pushed achieving financial
sustainability to the top of the microfinance agenda and has
underscored the limits to subsidization as an ongoing part of credit
camp, on the on the other hand, centers on improving the
will-being of the participants, with less interest in banking than in
using credit as a means to effect fundamental social and economic
changes for borrowers and communities. The model program is the
Grameen Bank, perhaps the best known microfinance program in the
world, which serves over two million poor households in Bangladesh.
Advocates recognize this, like to or not, continued subsidization is
apt to be an ongoing part of this mission, and their goal is to
better use public funds ear-market for poverty alleviation. The
program successfully target hard-to-reach segments of poor
populations and , against the odds, engender processes of change by
giving poor households a means to help themselves.
The three programs-Banco Sol, BRI, and the Grameen
Bank- are each worthy of support on their own grounds, and if the
reputational spillovers aid the general cause, so much the better.
But the cleavages are starting
to matter, particularly since much of the donor communities is in the
institutionalist camp, while most programs are in the welfarist camp.
At present, perhaps a dozen programs have followed institutionalist
principles and attained financial sustainability. Perhaps, a dozen
more will do so in the next five to ten years. These achievements are
impressive, but the programs are a distinct minority of the hundreds
of microfinance programs operating.
So, should the majority of programs fundamentally
reconstitute themselves in order to follow institutionalist "best
practices", raise interest rates, and pursue survival without
subsidies ? Or can they achieve more by marking out their own path
and continuing to balance the cost of subsidies against the benefits
to the participants ?
â Microfinance is a way to meet the demand for
financial services ( both savings and credit) among the 80% of the
people in developing countries who have no formal access to financial
institutions. ( CGAP)
is the provision of financial services to poor and low income
households and their micro-enterprises. (ADB)
In Bhutan, the concept of microfinance is a new
phenomenon and came into
existence in 1998 with the implementation of the project titled
"Strengthening Capacities for Sustainable Microfinance' signed
between the RGOB, UNCDF, SNV and BDFC as the implementing agency.
Today, BDFC is mandated to fulfill social aspects and recently to
attain sustainability as well.
As over 85% of the
population of Bhutan is dependent on agriculture, there is tremendous
potential and a challenging task as well towards development of this
sector. The agriculture sector in the rural areas in Bhutan are
basically operating on a subsistence level and the recent
microfinance conditions demand a greater pre-requisites in a move to
operation of BDFC is a hybrid of meeting social and sustainability
issues as well operating in 20 Dzongkhags. Therefore, the question is
whether BDFC is really suited to be microfinance institution moving
towards financial sustainability. Given the unique and peculiar state
of Bhutan, the decision need to be made as to what BDFC want to be in
future. The MFI's could also mean towards upliftment of the economic status and focus
on efficiency of the delivery of services.