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Islamic Microcredit in Bangladesh: Performance Analysis of Rural Development

Scheme (RDS) of Islami Bank Bangladesh Limited (1996-2009)

M. Kabir Hassan, University of New Orleans, United States

Md. Abul Bashar Bhuiyan1, National University of Malaysia, Malaysia

Mamunur Rashid, National University of Malaysia, Malaysia

November 08, 2010

ABSTRACT

Islamic Microfinance is still an emerging concept even in Bangladesh, the motherland for

Microfinance. This study analyzes the allocative, socio-economic and financial performance

of RDS for a sample of 14 years from 1996 until 2009. The study finds better coverage

efficiency in the villages, by branches, center and employee management. Socio-economic

performance is also noteworthy with the introduction of various social activities and

financing of microenterprises. Financially, this study suggests evaluating operating cost,

investment income and financing options of RDS in details to avoid riskiness in future.

Overall, the study puts prominence on adopting modern human resource management

techniques, as the Islamic Microfinance is more about dealing with poor people more closely

mitigating their socio-economic needs in a spiritual way.

Keywords: Islamic Microfinance, Rural Development Services, Bangladesh

JEL Classification: G2, N3

1Corresponding Author Email Address: [email protected]

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Islamic Microcredit in Bangladesh: Performance Analysis of Rural Development

Scheme (RDS) of Islami Bank Bangladesh Limited (1996-2009)

The devil promiseth you destitution and enjoineth on you lewdness. But Allah promiseth you

forgiveness from Himself with bounty. Allah is All Embracing, All Knowing

(Al-Quran, Verse No.268)

SECTION I

INTRODUCTION

Poverty is the central problem to sustainable human development. With the increasing

diversity in human poverty, an increasing percentage of world population is going under

poverty line every year. While it was difficult for conventional financial institutions to extend

financial help to continue the growth potentials of every human being, Microcredit

(microcredit and microfinance are hereafter used interchangeably) came with revolutionary

approach by providing the poor the accessibility to the credit to increase their productivity, for

reducing vulnerability, and to alleviate poverty through self-employed economic activities.

Microcredit deals with the poor those were ignored by formal financial institutions because of

not having assets for collateral, enough financial records, and credit history (Chowdhury,

2001; Hossain, 1988; Littlefield, Morduch, & Hashemi, 2003; Mahjabeen, 2007; Jonathan

Morduch, 2000; Wilkins & Jennifer, 2007).

Through the hands of Professor Mohammad Yunus, the concept of Microcredit is still

insufficient in many aspects to reduce the overall poverty level in Bangladesh (Amin, Rai, &

Topa, 2003) . On the same way Studies identified the interest rate charged by Micro-finance

Institutions (MFIs), which has a range of 15% to 20% from institutional and 33% to 120% in

non-institutional cases, as one of the major impediments behind the effective financing

solution for the poor Bangladesh (Amin et al., 2003; Kabeer, 2001). In such situation, number

of marginal poor people is increasing every year, from 78.2 million poor people in 1970 to

80.46 million people in 2009. (Imai & Azam, 2010; Islam, 2009)

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Apart from a missing holistic view in poverty reduction, the MFIs have not ruminated on the

spiritual, moral and ethical dimensions of human-socio-economic development, which is

precious in sustainable human development (M. Ahmed, 2006; Mohammed Nurul Alam,

2009). In the era of high-growth Islamic banking, the best-fit alternative to conventional

Microcredit is Islamic Microcredit, which promises the same benefits based on Shariah. As

Islam provides the complete code of life, the religion covers poverty reduction as one of the

premier agendas. Islam considers that poverty induces other indecent acts; therefore, poverty

should be treated with much care. Among more than three thousand MFIs at present working

in Bangladesh, Rural Development Scheme (hereafter referred to as RDS) is the largest

Islamic Microcredit program (M. Ahmed, 2006; Mohammed Nurul Alam, 2009; Habib,

Haque, Mian, & Bashar, 2004; M. Mizanur Rahmana, Jafrullahb, & Islamc, 2008; Parveen,

2009; M. Rahman & Ahmad, 2010; Uddin, 2008)

Despite of the increasing religious sympathy and higher interest rate with the counterparts,

RDS could not able to achieve significant progress in terms of outreach and socio-economic

development. Therefore, it is imperative to critically analyze the performance of RDS to

examine the way forward for better success in future. Applying performance analysis

techniques, this study analyzes the current status of Rural Development Schemes (RDS)

offered by Islami Bank Bangladesh Limited. The focus of this study is limited of generic

performance analysis, whereas the question - how Islamic is the RDS - is out of scope of

this study. Specific objectives of the study include analyzing the allocative efficiency of RDS,

the socio-economic contribution, and financial performance (Risk and Return ratios) of RDS.

The study has significance for both policy makers and Islamic MFIs (IMFIs), in terms of

setting up future goals and objectives for better Islamic Microcredit framework in

Bangladesh. Section 2 gives a synthesis of the literature review. Section 3 sheds light on Rural

Development Schemes. Section 4 highlights the data, Methodology and Analysis procedure.

Section 5 concludes with the results and direction for future researches.

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SECTION II

LITERATURE REVIEW

2.1 Poverty Alleviation: Islamic Evidences

Islam has made clear its goal for human and socio-economic development, which should be

through the ultimate satisfaction of Allah (SWT). Allah (SWT) has clearly communicated to

human race in the Quran to assist each other in righteous deeds (Al-Quran, Verse No. 2),

where the agreement should be written having witnesses with faithfulness between parties

where any future transaction involves (Al-Quran, Verse No. 282). The prophet Mohammad

(PBUH) has also stressed on cooperation and assistance, such comes in Al-Bukhari and

Muslim as: Believers are to other believers like parts of a structure that tighten and reinforce

each other. Another Hadith narrated by Annas ibn Malik notes how prophet put more

emphasis on solving poverty with trade, where the prophet suggests a poor man to sold some

articles from his house and buy an axe to cut woods from the jungle and sell it in the market

for earning money.

Narrated by Ubaydullah ibn Adl ibn al-Khiyar, appeared in Abu Dawood, another hadith

comes as: If you wish, I shall give you something, but there is nothing spare in it for a rich

man or for one who is strong and able to earn a living. Aub Dawood also report that Allahs

apostle reported begging as a negative sign that would come on the face of the begger in the

day ofJudgement. These hadiths and Quranic verses clearly provide evidences of how Islam

look at poverty and what are its solutions. Primarily, it can be concluded that Islam looks into

working hard and trading for solving poverty, where patience with belief upon Allah (SWT )

play leading role.

2.2 Impact of Micro-Credit

There are various ways for the assessment of the impact of microcredit on income and

consumption. A good number of impact studies were conducted to determine the real

situation as to whether there is positive or negative impact on the borrowers. Most of these

studies used before and after situation of borrowers income and consumption. Hossain

(1988) has concluded that both per capita income and household income increased positively

with the amount of credit obtained from Grameen Bank. On the other hand, he did another

empirical research in 1988 on the same issues and he found, on the basis of a survey of 1986

measuring borrowers perception, that 91 percent of Grameen Banks members improved

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their economic conditions i.e., increased income as well as consumption after joining

Grameen Bank (Hossain, 1988).

However, Todd (1996) studies in depth the grassroots of Grameen Bank. Two groups in

different villages were compared with a controlled group of women. The Grameen women had

been taking microcredit loans for a period of up to 10 years using a per capita income that

would support minimum daily intake of 1800 calories to establish a poverty line; Todd ranked

her 40 Grameen Banks women and 22 controlled women. Only 15.0% of the Grameen group

was classified as Extremely Poor compared to 54.5% of the controlled group.

Comparatively, 57.5% of the Grameen women and only 18.2% of the controlled group were

ranked as Not Poor and the remaining women were classified as Moderately Poor (Todd,

1996).

S. R. Khandker and Chowdbury together have conducted good impact study in 1996 to

examine the impact of Grameen Bank and BRAC. They found that in Grameen Bank

operational villages, 76 % of participants who have taken no loans or taken loan for one time

were below the poverty line when compared with only 57 % of those who have taken five or

more loans. Approximately five years duration for a poor member to work up to above the

poverty line, but eight years have elapsed before the member is able to function independently

from the microcredit institution (Khandker & Chowdbury, 1996). Khandker (1998) has done

empirical study to measure the varying effects of three major microcredit programs (Grameen,

BRAC and RD-12) on participants (male and female), as well as the socio-economic impact.

The study considers cumulative borrowing, thus reflecting both the impact of credit and the

duration of program participation. He has found that Microcredit programs help to increase

the per capita expenditure, childrens schooling, childrens nutritional status (at the participant

level), production, income, and wages (at the village level).

In contrast, in the same year, Osmani (1998) finds that Grameen banks microcredit has over

all positive impact on the borrowers income. However, it depends on the primary occupation

(self-employed non-farm activities and already are experienced on this sector) and if the credit

is used productively in non-farm self-employed activities. Furthermore, Morduch (1998)

concludes on the vulnerability of borrowers that in the consumption variability from season to

season, the results indicate a reduction of 47 percent variability for eligible Grameen Bank

households when compared with other controlled group. The study finally concludes that the

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pattern of consumption is smooth over the year. There also seems to be a greater stability of

labor supply in the program villages compared with the controlled groups, and non-

agricultural activities practiced by Grameen Banks members reduce familys vulnerability.

Chowdhury (2001) studies the impact of the microcredit program of Grameen Bank in

Bangladesh has on household poverty. The paper has used both subjective and objective

measures of poverty. The study finds for both the subjective and objective poverty measures

that microcredit reduces poverty. His impact study has compared microcredit program

households with the other households in terms of food availability to perceive impacts of

microcredit on food consumption of households in terms of weekly food consumption

expenditure, and the availability of food in the households. The average weekly food

consumption expenditure of member households is Taka 858.58 and the same is Taka 588.85

for non-members. In percentage, it is 46% higher with members. The study also indicates that

the risk of poverty of the beneficiaries of microcredit households is about 47% lower than that

of the nonparticipants. Microcredit increases entitlement on food through increase in income

of program households and these households can afford more to expend on food (Chowdhury,

2001).

A few authors show their findings about the success of microcredit with some preconditions,

that is,providing credit money has sometimes failed to reduce poverty if that money was not

used properly for income generating activities (IGAs) with the support of existing assets and

skill of borrowers. Hulme and Mosley (1996) note that the vulnerability of the very poor is

reduced and their poverty situation improves when the loans are associated with an increase in

assets, the borrowers are encouraged to invest in low risk and income generating activities,

and when the very poor people are encouraged to save. Khandker (2003) addresses similar

exercise by estimating the effects of micro finance on consumption, poverty and non land

assets for microcredit participants, non-participants, and an average villager. He has found

that microcredit programs have spill-over effects in local economies, thereby increasing local

village welfare. The study finds that microcredit assists reducing the extreme poverty more

than moderate poverty at the village level. Yet, the aggregate poverty reduction effects are not

quite substantial to have a large dent on national level aggregate poverty. This concern brings

to the fore the effectiveness of microcredit as an instrument to solve the problem of poverty in

Bangladesh.

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2.3 Microcredit Models

2.3.1 Group-based Microcredit Model

The famous action research on Jobra village undertaken by Professor Yunus in 1976 resulted

in various ground breaking Microcredit programs. His research ended up finding the popular

theoretical causes behind todays success of conventional MFIs (Basher, 2007, 2010;

Chowdhury, 2001; Dossey, 2007; Dowla, 2006; Kowalik, 2010). Among which, some

popular credit distribution impediments include lack of assets for collateral, lack of financial

records and limited credit from the formal financial institutions. The extension of this

theoretical understanding summarized for greater policy role in terms of bringing in a wider

generation of poor people in productivity and making their effort sustainable to help the

country keep growing. Group based microcredit model is the process of opportunity for peer

lending, peer monitoring, homogenous matching, and joint liability with credit risk between

the group members (Chowdhury, 2001; Dossey, 2007; Dowla, 2006; Fernandez, 2010; Hassan

& Tufte, 2001; Hossain, 1988; Kabir Hassan & Tufte, 2001; Karim, 2008; Kowalik, 2010;

Kuhinur & Rokonuzzaman, 2010; Osmani, 1998).

The Group based Microcredit is formed by five members in a group and with five to eight

groups forming a centre. All members in the centre meet with a loan officer weekly. They

have to learn the rules and regulation of MFIs in the first week, save $0.02 a week, learn to

sign their names, and memorize a set of vows to self-improvement. Each group elects a chair,

and each centre elects a chief and at first two members get loans first, and then, one month

later, two other members get loans. After one more month, the last member gets a loan.

Because most loans last exactly one year, staggered disbursement reduces the risk of domino

default because some borrowers must finish repayment before they know whether their

comrades will default(Dossey, 2007; Dowla, 2006; Hassan & Tufte, 2001; Kowalik, 2010;

Kuhinur & Rokonuzzaman, 2010; Wilkins & Jennifer, 2007; Zaman, 1999)

2.3.2 Islamic Microcredit Models

Many IMFIs in Bangladesh is also formed based on the Group-based Microcredit program.

However, the first major difference between the conventional Microcredit and the Islamic

framework is the presence ofRiba. Allah (SWT) said in Holy Quran: Allah will deprive riba

of all blessing, but will give increase for deeds of charity: and Allah does not love the

ungrateful and unjust (Al-Quran, Verse No.276), and Oh believers, fear Allah and forgo the

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interest that is owing, if you really believe (Al-Quran, Verse No. 278). Therefore, Islam has

prohivited the use of Riba in all transactions since it represents exploitations and oppressions.

Keeping these in minds, Islamic Microcredit models are also developed accroding to Shariah

rulling for finance. The following are some of the examples of Islamic Microcredit. (H.

Ahmed, 2002, 2004; Akhter, Akhtar, & Jaffri, 2009; Dhumale & Sapcanin, 1999; Dusuki,

2008; Khan & Phillips, 2010; Obaidullah, 2008; Obaidullah & Khan, 2008)

2.3.2.1 Mudaraba Microcredit Model:

Mudaraba is one of the most popular ways of Islamic microcredit where, a partnership

contract has been uccured between microenterprise (called mudarib & microcredit financiers

(called rabb al-mal) for making business on the basis of predetermind profit sharing. In this

partnership rabb al-malwill invest capital and mudarib will invest labour. The mudarib will

reward by shares in the profit without loss but the rabb al-malwill shares in both of profit and

loss. In effect, the microfinance program takes equity in the microenterprise through the

loan. Initially, the program may own 100 percent of the shares and would hence be entitled to

its predetermined share of all the profit. But as each loan installment is repaid, the

microentrepreneur buys back shares. As a result the microfinance program earns less profit

with each repayment received (Mohammed N Alam, 2003; Obaidullah, 2008; Obaidullah &

Khan, 2008)

2.3.2.2 Musaraka Microcredit Model:

Musaraka is also equity partnership contract between two partners as like as mudaraba

contract, but the basic difference being that in the former both the partners participate in the

management and the provision of capital, and share in the profit and loss. Profits are

distributed between the partners in accordance with the ratios initially set, whereas loss is

distributed in proportion to each ones share in the capital(Obaidullah, 2008; Obaidullah &

Khan, 2008)

2.3.2.3 Murabah Microcredit Model:

The murabaha contract is similar to trade finance in the context of working capital loans and

to leasing in the context of fixed capital loans. Under such a contract the microfinance

program literally buys goods and resells them to the microenterprises for the cost of the goods

plus a markup for administrative costs. The borrower often pays for the goods in equal

installments. This model is easier for borrowers to understand and simplifies loan

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administration and monitoring. The microfinance program owns the goods until the last

installment is paid (Mohammed N Alam, 2003; Obaidullah, 2008; Obaidullah & Khan, 2008)

2.3.2.4 Bai-Muajjal Microcredit Model:

Bai-Muajjal is another product of Islamic microcredit where MFIs Sale of goods on credit to

the members i.e. a sale in which goods are delivered immediately but payment will be

deferred (Mohammed N Alam, 2003; Obaidullah, 2008).

2.3.2.5 Bai-Salam Microcredit Model:

Bai-Salam is also a contact of sale in which payment is made in advance by the buyer and the

delivery of the goods is deferred time in the future by the seller(Obaidullah, 2008; Obaidullah

& Khan, 2008).

2.3.2.6 Micro-Leasing (Ijara):

The term Ijara means leasing or hiring of a physical asset. Ijara is also a contact between

MFIs & its member where MFIs lease their assets to the borowers to use within the certain

time on the basis of rental mode. It is a popular debt-based product in which the MFIs

assumes the role of a lessor and allows its client to use a particular asset that it

owns.(Obaidullah, 2008; Obaidullah & Khan, 2008)

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SECTION III

RDS OF ISLAMI BANKBANGLADESH LIMITED (IBBL)

3.1 Rural Development Scheme (RDS)

Islami Bank Bangladesh Limited started with the major objective of supporting an Islamic

economy for balanced economic growth by ensuring reduction of rural-urban disparity and

equitable distribution of income on the basis of Islamic rules and regulations. It is the largest

private bank in Bangladesh and started in 1983. The bank has been practicing group based

microcredit scheme, which is known as Rural Development Scheme (RDS). The scheme

was launched in 1995 as a pilot program styled after the Grameen Bank model except that the

scheme used Islamic modes of investment based on Shariah principles. Among many, the

primary focus of RDS is to provide the financial access to poor people for creating

opportunity of income generation with a view to alleviate poverty in a sustainable manner

(IBBL, 2009; M. M. Rahman, Jafrullahb, & Islam, 2008).

Some of the objectives of RDS, IBBL are listed below:

y To extend investment facilities to agricultural, other farming and off-farming activitiesin the rural areas.

y To finance self-employment and income generating activities of the rural people,particularly the rural unemployed youths and the rural poor.

y To alleviate rural poverty through integrated rural development approach.y To extend investment facilities for hand tube-wells and rural housing, keeping in view

the needs of safe drinking water and housing facilities of the rural poor

y To provide education and Medicare facilities to the down-trodden people.

Initially it started as a pilot operation in the rural areas of several districts under the direct

supervision of the nearby branches of the Bank. At present, it is extended to all the 61 districts

out of 64 districts of the country through 139 Branches of the Bank. The metropolitan areas

and three Chittagong Hill Districts are yet uncovered for strategic reason(IBBL, 2009).

Exhibit 1 below provides a highlight of RDSs progress.

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Exhibit 1: The progressed report of RDS, IBBL

Description 2005 2006 2007 2008 2009

Branches 101 118 129 136 139

Villages 4,560 8,057 10,023 10,676 10,751

Members/clients 217,445 409,575 516,725 577,740 492,475

Investment Outstanding (Takamillion) 1,106.47 2,242.21 2884.66 3,011.72 3752.2

Source: (IBBL, 2009)

It has been practicing Murabaha and Bai-muajjal modes of investment for financing. Very

recently, RDS has started Musharaka mode as well. In all cases, the Branch must ensure strict

adherence to the banking and shariah in norms. For this investment, RDS charge only 10

percent profit on flat rate with a rebate of 2.5 per cent for timely payment while the

conventional microcredit institutions charges 15 to 22 per cent interest for income generation.

The investment recovery rate of RDS is 99.57 per cent in 2009 (IBBL, 2009).

3.2 Impact of RDS on Poverty Alleviation

RDS is considered as a new paradigm in poverty alleviation and bring about development (H.

Ahmed, 2003). RDS has large positive impact, which is observed in the case of food intake,

housing, education, clothing, taking medical treatment, use of toilet, use of clear pure water,

income, expenditure and as such economic, socio-economic, health and physiochemical

environment (Uddin, 2008). Parveen (2009) argues that RDS of IBBL has been treated as a

sustainable MFI in the rural development and poverty alleviation of Bangladesh with a shortspan of time of its establishment. Another study has found that MFIs are based on the implicit

assumptions of social class conflict, so they tend to empower women, whereas Islamic MFIs

intend to empower family by ensuring joint liability of husband and wife in case of lending to

family or groups of families, which ensures a mutual liability sharing and cooperation in the

family. (Mannan, 2006)

Habib et al. (2003) examine the effectiveness of RDS credit by interviewing a few randomly

selected program beneficiaries located in Sadar and Fulbaria Upazila of Mymensingh district.

Most of the beneficiaries found having required loan money within reasonable time limit

during the study period. Loan was used productively irrespective of loan holder categories.

Loan repayment performance of the beneficiaries was observed to be satisfactory. Self-

consciousness and hope of receiving future loan were observed to be the major contributing

factors for good loan repayment behavior of the beneficiaries. Small borrowers were good re-

payers followed by the medium and large borrowers.

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Rahman found in 2008 that most of the clients have utilized their borrowed Money and

increseed household income and expenditure had increased significantly and clients had a

positive opinion towards the microinvestment programme as it improved their standards of

living but the reality is that not all the clients have invested their borrowed money in income

generating activities. Instead, some of them have utilised their investment in house repairing,

childrens marriage ceremony and furniture purchase etc (M. M. Rahman et al., 2008).

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SECTION IV

METHODOLOGY

The scope of this study is to perform an appraisal of the performance of Rural Development

Schemes (RDS), the largest Islamic MFI in Bangladesh. Data were collected from Islamic

Bank Bangladesh Headquarter in Dhaka for a total period of 14 years from 1996 until 2009,

yearly basis. The data mostly include balance sheet and income statement information along

with some allocative statistics regarding the coverage, social contribution and human resource

engagement. Exhibit 2 and 3 highlight the growth of some selected statistics, which include

villages covered, growth of number of group members and clients, growth in net savings of

the members, growth of recovered amount of investment, fund deployed under RDS, growth

of investment income, operating cost and profit and loss.

Exhibit 2: Growth of Selected Statistics (1997 2009)

VillagesCovered

GroupMembers

ClientsNet

SavingsTotal

Recovery

FundDeployed

in RDS

InvestmentIncome

Opt.Cost

Profit/Loss

Mean 0.69 0.55 0.56 0.22 0.91 0.72 0.75 0.62 2.98

St. Dev 1.09 0.56 0.68 0.21 0.77 0.65 1.01 0.70 15.29

Min 0.00 -0.15 -0.08 -0.16 0.26 0.06 0.06 0.00 -12.86

Max 3.12 1.72 2.12 0.58 3.09 2.22 3.87 2.47 52.44

The study intends to highlight the performance of RDS from allocative, socio-economic and

financial (risk-return ratios) standpoints. Islamic MFIs are still at the emerging stages and

conducting allocative performance tests are timely for IMFIs. By allocative performance/

efficiency, the study indicates the allocation of RDS operation into different operational

segments by region, branches, groups of employees, clients and number of group members.

These segments can be grouped into two major areas of concern; internal segments, which

includes the branches, groups of employees, clients and group members, and external

segments that includes mainly geographic segments such as the growth of operation by

villages and districts covered. For these categories of analysis, we have also shown the

descriptive statistics (in terms of mean, minimum and maximum) to explain the existing status

of the RDS coverage.

Under the RDS program, IBBL has distributed tube-well for safe water and also have built

sanitary latrine in the remote areas. Some of the members are also given waivers from their

payment of the principal for extreme poverty cases. These issues are categorized as social

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contribution of RDS. Likewise, RDS has started giving investment to micro-enterprises.

These investments are especially important for rural economy and, therefore, are considered

as input to economical development by RDS. Finally, risk and return ratios are common in

performance analysis studies. To present the extent of success and riskiness of operation, a

number of risk and return ratios are calculated. Calculations and formulas explained in

Hempel and Simonson (1999) are followed for risk and return ratios. The return and risk

ratios are slightly redesigned to fit the need of the study and type of Islamic Microcredit data.

Exhibit 4 shows a highlight of the formulas for allocative and risk, and return performance

analyses.

Exhibit 2 shows the growth of Islamic MFIs in Bangladesh. The mean growth rate of village

coverage was 69% during the sample period. Group members increased on average at 55%

rate every year, clients at 56%, and net savings of the members at 22%. Growth of recovery ofthe investment stood at 91% average, which has supplemented by 72% yearly growth in fund

deployed in RDS. Investment income has grown at 75% over the years, operating cost has

grown at 62%, and net average profit growth after adjustment of cost of fund has grown

approximately at 300% over the years. The statistics clearly shows how profitable the Islamic

MFIs are. However, shortly we will also observe the riskiness in terms of volatility of income

and expenses due to various factors.

Exhibit 3: Selected Allocative Segments for Selected Years

Branch District DivisionNo of DirectEmployment

Centers

1996 20 18 4 83 140

2000 69 47 5 522 3104

2001 69 47 5 508 4052

2005 101 57 6 969 8526

2009 139 61 6 1747 22261

Note: No of Direct Employment is the sum of no of Field

Officer, Project Officer and Assistant project officer

Exhibit 3 shows how the operation has been allocated for selected years. RDS was offered

with only 20 branches at the beginning, which is now offered from 139 branches at the end of

year 2009. These branches are scattered in 61 districts (out of 64 districts ) and in six

divisions. The hilly areas in the Southeastern side of the country are largely uncovered until

2009. Total number of direct employment, especially as field officers, has increased

substantially from only 83 in the first year to 1747 at the end of 2009. Increase in no of

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centers has outnumbered all other segments, which was only 140 at the end of 1996 and ended

up at 22261 in 2009. However, direct employee per center has decreased drastically, which is

an area of concern for member-management in a group based Microcredit program.

Exhibit 4: Formula used for Allocative and Risk, and Return Performance of RDS

Part I: Allocative Performance

SL Item Equation

1 Inv_ Per Client Investment No of clients2 Inv_ Per Branch Investment Branches offering RDS services

3 Inv_ PerEmployeeInvestment No ofEmployees directly working withRDS

4 Savings per Member Net Savings No of group members5 Savings per Branch Net Savings Branches offering RDS services6 Savings per Village Net Savings No of villages under RDS coverage

7 Savings perEmployee

Net Savings No ofEmployees directly working with

RDS

8 Dis_ branch Disbursement Branches offering RDS services9 Dis_ clients Disbursement No of clients10 Dis_ village Disbursement No of villages under RDS coverage

11 Recovery per employeeTotal recovery No ofEmployees directly workingwith RDS

12 Village per FONo of villages under RDS coverage Field officerdirectly working with RDS

13 Member per FONo of group members Field officer directly workingwith RDS

14No. of Branch Handling theMEIS

No of Branch offering MicroEnterprise InvestmentServices

15No. of Member / Clients underMEIS

No of Members under MicroEnterprise InvestmentServices

16 Inv Inc per branchInvestment Income No of Branches offering RDSservices

17 Inv inc per villageInvestment Income No of villages under RDScoverage

18 Inv Inc per employeeInvestment Income No ofEmployees directlyworking with RDS

19 Inv Inc per client Investment Income No of clients20 Salaries per employee

Total Salaries Expenses No ofEmployees directlyworking with RDS

21 Opt cost per branchTotal Operating Cost No of branches offering RDSservices

22 Profit per Branch Net Profit No of branches offering RDS services

23 Profit perEmployeeNet Profit No ofEmployees directly working withRDS

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24 Profit per member Net Profit No of group members25 Profit per client Net Profit No of clients

Part II: Socio-economic Contribution of RDS

SL Item/ Description

Economic Condition to Microenterprises Investment Scheme (MEIS)1 Cumulative Disbursement under MEIS2 Present Outstanding under MEIS

3 Average Size of Investment under MEIS

Societal Contribution

4 Amount Disbursed against Tube-well (Since inception)5 Amount Disbursed against Sanitary Latrine (Since inception)6 Amount of Waiver Given on Investment to Clients

Part III: Risk and Return Performance

SL Item Equation

RiskRatios1 Savings as % of Disbursement (Net savings Disbursement) x 100

2 % of Recovery (Recovered Amount Disbursement) x 1003 COF % Directly taken from the Income Statement

4% of Risk Fund Provision toDisbursement

(Risk Fund Provision Disbursement) x 100

5Operating Exp as % of TotalIncome

(Operating Expenses Total Income) x 100

6 Salaries Exp as % of Total Income (Total Salaries Expenses Total Income) x 1007 Expenditure per Taka of income (Total Expenditure Total Income)

Return Ratios

8Investment income as % ofDisbursement

(Investment Income Disbursement) x 100

9Investment income as % of TotalIncome

(Investment Income Total Income) x 100

10Net Profit as % of InvestmentIncome

(Net Profit Investment Income) x100

11 Net Profit as % of Disbursement (Net Profit Disbursement) x 100

12Profit Margin as % ofDisbursement

((Investment Income Cost of Fund) Disbursement) x 100

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SECTION V

DISCUSSION OF THE FINDINGS

5.1 Results and Discussions

This study discusses the performance of Rural Development Schemes (RDS) of IBBL from

three different but integrated standpoints; the allocative (coverage), socio-economic

contributions and the financial performance (through risk-return ratios).

5.1.1 Allocative Performance

Allocative performance analysis allows us to understand average coverage of certain

operational variable (such as investment or sales) into a wide variety of allocative segments

(such as villages, branches, and people). Studies conduct allocative performance analysis

mostly for the emerging institutions to examine the coverage and scope of operation. RDS

started its operation in 1996 with only 7800 Taka per client, which stood at 18800 Taka with

an average year-to-year growth rate of 8.1%. Likewise, investment per branch has grown at

over 40% and investment per employee grew at 32% (approximately) on average (see Exhibit

5). Recent amendments in Microcredit regulation in Bangladesh allow the institutions to

accept deposit to encourage people for saving.

Exhibit 5: Alloctive Performance for Investment and Savings (in % Growth and in Taka Value)

Inv_ Per

Client

Inv_ Per

Branch

Inv_ PerE

mployee

Savings/

Member

Savings per

Branch

Savings/

Village

Savings/E

mployee1996 (TK) 7800.76 924000.00 222650.60 272.86 45500.00 14444.44 10963.86

1997 (%) 19.6% 104.1% 185.3% 56.2% 139.7% 283.5% 235.1%

1998 (%) -28.9% -21.4% -47.5% 23.9% 62.8% -44.1% 8.7%

1999 (%) -9.7% 144.2% 62.2% 5.8% 148.8% -30.2% 65.2%

2000 (%) 10.9% 58.2% 40.0% 35.0% 83.9% 89.8% 62.7%

2001 (%) 5.2% 49.7% 53.9% 30.7% 76.8% 9.0% 81.6%

2002 (%) 9.0% 8.1% 1.8% 57.8% 59.2% 29.7% 49.8%

2003 (%) 7.9% 10.6% -0.6% 12.7% 20.6% 6.5% 8.4%

2004 (%) 11.0% 29.8% 23.8% 12.5% 30.0% 23.3% 24.0%

2005 (%) 11.4% 24.3% 18.1% 7.3% 27.2% 32.4% 20.9%

2006 (%) 5.4% 62.2% 20.4% -16.1% 35.4% -10.5% 0.4%

2007 (%) 13.1% 22.9% 5.6% 14.8% 32.4% 16.4% 13.8%

2008 (%) 15.0% 0.1% 10.9% 7.9% 14.4% 13.2% 26.7%2009 (%) 34.6% 27.9% 38.2% 37.5% 14.7% 16.4% 24.0%

2009 (TK) 18800.00 42202446.04 3357836.29 3023.00 10710575.54 138477.35 852186.61

Mean (TK) 9587.00 14756189.92 1375222.18 1425.85 3613475.25 68439.90 320859.54

Mean (% Growth) 8.1% 40.1% 31.7% 22.0% 57.4% 33.5% 47.8%

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Exhibit 5 shows that savings per member started at only 272.86 Taka per member, which in

constant dollar term is around $3-$3.5. In 2009, savings per member stood at 3023 Taka with

an average year-year growth of 22% during 1997-2009. Branches and field officers have

played active role in collecting deposit from the members through group membership and

center activities as the savings per branch grew at around 57%, saving per village and per

employee grew at 33.5% and 47.8% respectively on an average. These results indicate that

group based models have their benefit within and Microcredit business largely depends on the

field workers and branch activity.

Exhibit 6: Allocative Performance for Disbursement and Recovery(in % Growth and in Taka Value)

Dis_ branch Dis_ clients Dis_ villageRecovery per

employee

1996 (TK) 924000.00 7800.76 293333.33 110963.861997 (%) 112.3% 24.4% 239.6% 257.4%

1998 (%) -42.6% -48.1% -80.3% 14.3%1999 (%) 233.1% 23.2% -6.5% 29.8%2000 (%) 50.1% 5.2% 55.0% 59.5%2001 (%) 56.9% 10.2% -3.3% 115.3%2002 (%) 9.6% 10.5% -10.7% 42.1%2003 (%) 11.4% 8.8% -1.6% 16.4%2004 (%) 33.4% 14.1% 26.5% 27.5%2005 (%) 25.2% 12.2% 30.3% 21.6%

2006 (%) 54.1% 0.1% 1.9% -7.9%2007 (%) 30.5% 20.2% 14.7% 22.5%2008 (%) -2.4% 12.1% -3.4% 48.6%

2009 (%) 11.5% 17.4% 13.2% 33.6%2009 (TK) 39355546.76 17531.38 508829.04 11615334.86

Mean (TK) 15251851.74 9777.07 374969.66 3649306.88

Mean (% Growth) 44.8% 8.5% 21.2% 52.4%

Exhibit 6 shows the percentage growth and Taka value of disbursement and recovery.

Disbursement by branch grew at around 45% every year on an average. However, per client

the growth was only 8.5%, which indicates some variation in the level of disbursement among

clients. A client was borrowing around 7800 Taka ($150 -$155) in 2009, which is more than

double in 2009. This indicates the sustainability issue of the borrower; however, due to

changes in inflation rate, it cannot be clearly related to poverty reduction. Growth of

Recovery (some figures are more than 100%, since it the growth of recovery amount, not the

recovery percentage) depends on the effort of all direct employees and activities in the center

under group based microcredit operation. Exhibit 6 shows that recovery per employee

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(directly engaged with RDS program both in field and in project offices) has grown over 52%

over the years, on average, from 1997 to 2009.

Exhibit 7: Allocative Performance for Coverage

Villageper FO

Memberper FO

No. of BranchHandling the MEIS

No. of Member / Clientsunder MEIS

1996 1 53 0 01997 1 130 0 01998 2 98 0 01999 4 139 0 02000 3 164 0 02001 5 229 0 02002 6 215 0 02003 6 204 18 355

2004 6 224 48 14712005 5 250 66 28412006 6 299 97 2487

2007 6 300 115 64472008 7 357 134 9829

2009 7 326 135 19069

Mean 5 213 44 3036

St. Dev 2 89 55 5473

Exhibit 7 highlights the village and members covered by each field officer (FO ), no of

branches offering Microenterprise Investment Scheme (MEIS) and no of members under

MEIS. The human resource activeness seems to be the toughest job where each FO has to

cover 326 members and 7 villages in the year of 2009. A better sales-force management might

be necessary to crop better result. RDS started serving the Microenterprises from the year

2003. In that year, 18 branches were given the charge of handling the MIES services, which

stood at 135 branches throughout the country in61 districts. It is amazing to see the growth

potentials of MIES as the number of members/ clients availing the services grew almost to

double from 2008 to 2009. The program started with only 355 members and became a 19069

members family at the end of 2009.

E

xhibit 8 gives a picture of the investment income, salaries expenses and operating costgrouped into various allocative segments. Even though in nominal Taka value the investment

income was positive, due to higher growth in branches (operating with RDS), villages

(covered under RDS), employee (directly working with RDS) and clients (availing investment

form RDS), percentage growth of investment income dividend into these allovative segments

shows a negative results. The positive sign is there as well. Investment income per client in

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2008 and 2009 became positive. Salaries per employee show an average increase of 30% over

the years. However, this increase cannot be directly discussed in the context whether RDS

pays too low or too high compared to other microcredit programs. Operating cost per branch

has also increased at around 37% per year on an average. These are the two important area of

concern since successful operation of Microcredit depends on efficient management of human

resources. Salaries expenses carry a major weight in the operating cost.

Exhibit 8: Allocative Performance for Income and Expense (% growth and in Taka amount)

Inv Incper

branchInv inc per

village

Inv Incper

employee

Inv Incper

client

Salariesper

employeeOpt cost

per branch

1996 (TK) 55440.00 17600.00 13359.04 468.05 8674.70 57500.001997 (%) -37.5% 0.0% -12.6% -63.4% 151.2% 48.9%1998 (%) -28.9% -75.6% -52.5% -35.6% 8.5% 50.8%

1999 (%) -13.5% -75.7% -42.5% -68.0% 108.3% 200.4%2000 (%) -24.6% -22.2% -33.3% -47.2% -18.4% -8.8%2001 (%) 0.0% -38.3% 2.8% -29.7% 45.0% 35.7%2002 (%) -5.5% -23.0% -11.0% -4.7% 6.4% 14.4%2003 (%) -12.0% -22.3% -20.9% -14.1% -2.0% 10.0%2004 (%) -7.8% -12.5% -12.1% -21.1% 2.9% 6.2%2005 (%) -10.9% -7.2% -15.3% -20.1% 10.9% 21.8%2006 (%) -14.4% -43.4% -36.5% -44.4% 24.5% 68.4%

2007 (%) -8.5% -19.6% -21.4% -15.8% -6.8% 8.6%2008 (%) -5.1% -6.1% 5.0% 9.0% 52.3% 30.7%

2009 (%) -2.2% -0.7% 5.8% 3.0% 5.7% -2.3%

2009 (TK) 7976.98 103.13 634.69 3.55 129513.45 1824820.14

Mean (TK) 18154.31 3107.20 3326.61 62.10 62527.59 750446.16

Mean (% Growth) -13.1% -26.7% -18.8% -27.1% 29.9% 37.3%

Exhibit 9: Allocative Performance for Profitability(in growth % and Taka amount

Profit perBranch

Profit perEmployee

Profit permember

Profit perclient

1996 (TK) 34880.00 8404.82 209.18 294.471997 (%) 222.6% 351.0% 110.2% 89.1%1998 (%) -109.7% -106.5% -107.4% -108.8%2002 (%) -5.0% -10.6% -5.9% -4.3%2003 (%) 13.3% 1.9% 5.9% 10.7%

2008 (%) -98.2% -98.0% -98.3% -97.9%2009 (%) 3442.8% 3730.3% 4147.9% 3630.6%

2009 (TK) 260503.60 20726.96 73.53 116.04

Mean (TK) 212513.42 24186.86 154.83 201.33

Mean (% Growth) 110.6% 187.4% 231.8% 199.8%

Growth of net profit has been astonishing (see exhibit 9). Average profit per branch,

employee, member and client all grew average at more than 100% over the years. Due to data

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shortage, we failed to indentify the drastic reduction in the profit of 2008 in details.

Consequently, the profit of 2009 was even in 1000%. However, due to comparative higher

growth of allocative segments, profit per employee and members was lower in 2009

compared to 1996. To identify the sudden change in the income and expense statement, we

suggest carrying out in-depth analyses on cost and profit efficiency of RDS. RDS is still a part

of IBBL and does not fall under microcredit authority supervising other microcredit firms in

Bangladesh. Therefore, the auditors statement should also be taken under consideration.

5.1.2 Socio-economic Contribution

Rural Bangladesh has scarcity of pure water and lack of proper sanitation system. RDS, along

with its investment, has disbursed a huge sum of money for setting up Tube-well and sanitary

latrine in the rural areas. In the year of 2009, a total of 14.83 Million Taka was disbursed for

tube-well and 4.57 Million Taka for constructing sanitary latrine in the village areas (Exhibit

10). Islamic finance follows the principle of waiving fees and even the principal amount if the

borrower cannot pay for some difficulties that satisfy the requirement for waiver. The amount

of waiver in Million Taka stood at 1.86 Million in 2009 with an overall 14-year average of

0.85 Million Taka. The maximum amount RDS waived, 2.77 Million, was in the year of 2008

(Exhibit 10).

Exhibit 10: Social Contribution (in Million Taka) for selected years

Tube-well(Taka disbursed since

inception)

Sanitary Latrine (Takadisbursed since

inception)Waiver

1996 0.00 0.00 0.01

2000 0.60 0.10 0.082001 1.80 0.35 0.172005 8.16 1.88 1.162008 13.53 3.97 2.77

2009 14.83 4.57 1.86

Mean 5.29 1.45 0.85

St. Dev 5.49 1.63 0.96

Min 0.00 0.00 0.01

Max 14.83 4.57 2.77

Exhibit 11 shows that the cumulative disbursement under MEIS program grew 10 times from

2005 to 2008 and grew more than double further during 2008 and 2009. Present outstanding

during 2008-2009 under MEIS grew more than double as well. However, the ratio of

disbursement to outstanding is higher in 2009 when compared with 2008, which indicates

some problem with collection of fund under MEIS. Further analysis is need in this area, while

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it is significant in rural development. Mean size of yearly-average investment under MEIS is

17.60 Million per year, which went up to Taka 56.68 Million in 2009. RDS started

highlighting the MEIS from 2005. Therefore, the growth until 2009 is far-fetched.

Exhibit 11: Entrepreneurial Services for Micro-enterprises

Cumulative Disbursedunder MEIS

PresentOutstanding under

MEIS

Avg. Size ofInvestment under

MEIS

1996 0.00 0.00 0.00

2000 0.00 0.00 0.002001 0.00 0.00 0.002005 115.31 63.26 22266.812008 1108.98 488.93 49743.11

2009 2553.31 1080.91 56684.15

Mean 316.72 147.46 17602.03

St. Dev 713.20 304.58 21981.34Min 0.00 0.00 0.00

Max 2553.31 1080.91 56684.15

5.1.3 Financial Performance: Risk and Return Ratios

Risk and return go hand in hand. Investment involving no risk or excessive risk is prohibited

in Islam. In this subsection, the study presents a number of risk and return ratios. The risk

ratios present the volatility in the amount on a year-by-year basis and for the entire sample of

14 years. These ratios are related to lack of recovery of investment, changes in cost of fund,

lower savings to investment ratio and others on volatility of income and investment. Return

ratios are related to investment income and profitability.

Exhibit 12: Risk Ratios

Saving as %of

Disbursement

% ofRecovery

COF%

% of Risk FundProvision to

Disbursement

OperatingExp as % of

Total Income

Salary Expas % of

TotalIncome

Expenditureper Taka of

income

1996 4.92% 100.00% 7.00% 2.00% 51.86% 42.39% 0.68

2000 14.44% 99.00% 7.00% 3.59% 45.60% 40.24% 0.69

2001 16.27% 97.00% 7.35% 1.94% 46.65% 42.55% 0.77

2005 25.33% 99.00% 6.82% 0.00% 48.36% 43.42% 0.83

2008 26.47% 99.01% 6.00% 0.00% 61.10% 55.42% 0.99

2009 27.21% 99.00% 6.00% 0.00% 55.21% 50.15% 0.92Mean 19.06% 98.93% 6.66% 1.31% 51.45% 45.89% 0.80

St. Dev 7.63% 0.73% 0.48% 1.28% 8.75% 8.29% 0.13

Min 4.92% 97.00% 5.74% 0.00% 36.38% 31.87% 0.52

Max 27.21% 100.00% 7.35% 3.59% 75.16% 68.18% 1.06

Exhibit 12 gives a draft of the risk ratios of RDS program. RDS by right is neither a full

pledged bank nor a Microcredit institution. It does not directly fall under the Microcredit

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when compared with the highest of 68% in 1998. Total expenditure per taka of income has

increased historically from 0.68 Taka in 1996 to 0.92 Taka in 2009. The average is 0.80 Taka,

whereas the highest was 1.06 in 1998. Salaries expenses are still at the core of higher

expenditure and expenditure management mostly depends on how efficiently salaries

expenses are managed. Obviously, the prerequisite is to manage the employee in the most

efficiently way.

Exhibit 13: Return Ratios

Investmentincome as % of

Disbursement

Investmentincome as % of

Total Income

Net Profit as %of Investment

Income

Net Profit as %of Disbursement

Profit Margin as %of Disbursement

1996 6.00% 50.00% 62.91% 3.77% 4.00%

2000 5.57% 40.44% 74.49% 4.15% 2.23%

2001 5.38% 46.13% 49.24% 2.65% 1.80%

2005 8.98% 100.00% 16.56% 1.49% 5.83%

2008 8.66% 100.00% 0.24% 0.02% 5.31%

2009 8.40% 100.00% 7.88% 0.66% 5.30%Mean 7.75% 72.95% 33.55% 2.33% 4.60%

St. Dev 1.62% 25.67% 30.93% 1.98% 1.65%

Min 5.38% 40.44% -12.69% -0.97% 1.80%

Max 10.07% 100.00% 95.63% 5.82% 6.98%

Investment income is the major income for RDS and disbursement is the real value of

investment for a given year. Therefore, a higher percentage of investment income to

disbursement can be explained as the efficient use of the investment fund. The ratio has

increased from 6% in 1996 to 8.40% in 2009 with an average of 7.75% over the years.

However, the maximum of this ratio was 10.07%, which indicates opportunities for RDS.

Investment income became the only income from the major income during the sample period.

Until 2004, investment income was the major income. However, from 2005 until recently,

investment income is the only income for RDS. Therefore, efficient client management at the

center, recovery actions and policies at branches are expected to play major role in increasing

investment income in future.

Net profit as a percentage of investment income shows the efficiency of operating cost

management, investment management and recovery management as well. Higher the ratio,

better is the performance. As the number of members, clients and employees are increasing at

a higher rate than the growth of disbursement and investment income, the ratio of net profit to

investment income has reduced to a drastic 7.88% in 2009 from around 50% in 2001. Net

profit as a percentage of total disbursement can be considered as the typical Return of Asset

(ROA). Higher ROA is better for the company. ROA is reducing every year from 3.77% in

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1996 to 0.66% in 2009 with an average of 2.33% during 1996-2009. Profit margin is

calculated by deducting interest expense (cost of fund) from interest income (investment

income). Profit margin to disbursement ratio tells us about the operating efficiency of the

firm, where the profit margin can also be called as operating profit margin. Higher ratio would

signal better operating efficiency. As indicated by operating cost and salaries expenses earlier,

this ratio shows a better result with 4.0% in 1996 to an upper level of 5.30% in 2009.

5.2 Managerial Implications

A summary of the above results can be analyzed further for policy implications. Some of the

important issues are summarized below:

a. Efficient human resource is the key to success in Microcredit success in Bangladesh.As Islamic Microfinance considers the clients and members as partners in different

models, building strong link with clients will bring better results in future. Field

officers and project officers should be trained on the process of handling with village

people, the consumption need and their business needs as well.

b. Operating cost and operating risk are among the significant issues the IMFIs shouldlook into. Efficient human resources management would increase the compensation

charged by the employees. On the other hand, lack of efficient staffs would create

competitive risk in the field in collecting deposit and investment. As a result, the

human resource management should be more strategic that maximizes the value of the

operation.

c. Social and Entrepreneurial contribution should be extended as much as possible with aview to develop the rural economy. Nationalized and other private and foreign

commercial banks failed to serve the rural economy leaving the hole too wide for the

Non-governmental organizations and Microcredit institutions. Furthermore, RDS

should step forwards towards socio-economic contribution because of its religious

motive of operation.

5.3 Future research

Data availability is an important limitation in IMFIs. Future research may take initiative to ask

the questions on the extent of Islamic operation in Islamic microfinance, on operational

efficiency of the Islamic microfinance, on regulatory sufficiency and worldwide comparison

with multi-dimensional performance indices.

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