A recent government proposal to establish a new type of financial institution, the Microcredit Bank (MCB), is poised to fundamentally reshape Bangladesh’s renowned microfinance landscape, threatening to dismantle a system celebrated for its deep community integration and holistic approach to poverty alleviation. Announced through a draft ordinance with a startlingly brief consultation period from December 15, 2025, to January 15, 2026, this initiative is not being viewed as a supportive measure by many within the sector. Instead, it is seen as an ill-conceived policy that poses a direct and profound threat to the very fabric of the nation’s socially embedded microfinance ecosystem. Critics argue that the proposal entirely ignores the sector’s most pressing, real-world problems and instead introduces a competitive, profit-driven model that could trigger a cascade of negative consequences, including unfair competition, widespread mission drift, and the potential collapse of hundreds of small and medium-sized, community-focused institutions that serve as a lifeline for millions.
A Solution in Search of a Problem
Rushed Policy Ignored Voices
The most immediate and glaring flaw in the MCB proposal is its deeply exclusionary process, which seems designed to bypass rather than invite meaningful dialogue. The government has allocated a mere one-month window for public feedback on a policy that will profoundly impact a sector comprising nearly 700 licensed Microfinance Institutions (MFIs) and the millions of clients they serve. This hasty timeline effectively sidelines the vast majority of stakeholders, particularly the small and medium-sized MFIs that form the backbone of grassroots development in the country’s most remote regions. By failing to engage with these essential organizations, the consultation process risks becoming a mere formality, a top-down directive disguised as a collaborative effort. These smaller institutions are not just lenders; they are critical community partners whose voices are indispensable for crafting sustainable and effective financial inclusion policies. Their exclusion from the conversation signals a dangerous disconnect between policymakers and the on-the-ground realities of microfinance.
These smaller and medium-sized MFIs are the primary conduits for a model of development that extends far beyond simple financial transactions. They embody a holistic approach, utilizing their operational surplus—a practice actively encouraged by the Microcredit Regulatory Authority (MRA) up to a 20% limit—to fund a wide array of essential “plus” activities. These initiatives include providing community health services, establishing and supporting educational programs for children, and mounting rapid disaster response efforts in a country highly vulnerable to climate-related catastrophes. This integrated model forms a critical social safety net that has been instrumental in improving quality of life and building resilience at the local level. The proposed shift towards a purely commercial banking structure, as embodied by the MCB, would almost certainly lead to the abandonment of these vital social programs. The logic of a bank is profit maximization, which leaves little room for the non-revenue-generating activities that define the very essence and success of Bangladeshi microfinance.
Addressing the Wrong Issues
The government’s singular focus on creating a new banking structure represents a significant misallocation of resources and attention, as it fails to address the five most acute challenges currently plaguing the microfinance sector. Insiders have repeatedly highlighted these pressing issues as the true impediments to the sector’s health and growth. Among the most critical is the operational risk of loan duplication, where borrowers take on debt from multiple MFIs simultaneously, creating over-indebtedness and increasing the likelihood of default, which in turn threatens the stability of lenders, especially smaller ones. Furthermore, a disturbing rise in staff misappropriation and fraud, which can erode 1-2% of an MFI’s capital, is a growing concern that the slow legal system fails to adequately address. By ignoring these deep-seated, systemic problems, the MCB proposal offers a solution to a problem that does not exist while allowing the sector’s actual vulnerabilities to fester and grow more severe.
Compounding these challenges are a general trend of increasing loan defaults, the severe lack of access to affordable, subsidized capital for small and medium MFIs, and cumbersome registration processes. While PKSF (Palli Kormo Sohayak Foundation) serves as a primary source for subsidized wholesale loans, it is chronically underfunded and cannot meet the sector’s needs. When MFIs turn to commercial banks, they are met with high commercial interest rates and burdensome conditions like processing fees and collateral requirements, making it an unviable option for many. Consequently, the most reliable source of capital remains member savings, which limits growth potential. The registration process with the Register of Joint Stock Companies (RJSC) is another significant hurdle, described as overly complicated and expensive. The government’s energy would be far better spent streamlining these processes and creating mechanisms for affordable capital injection rather than pursuing the creation of a new, disruptive, and unnecessary banking tier that solves none of these fundamental issues.
Creating an Uneven Playing Field
The Superpowers of a Microcredit Bank
The draft ordinance, as it stands, would effectively grant MCBs a set of “superpowers,” creating a fundamentally imbalanced competitive environment that is seemingly designed to favor the new entities at the expense of existing MFIs. Unlike current institutions, MCBs would be empowered under the Public Demands Recovery Act of 1913, a powerful legal instrument that allows them to file “certificate cases” against defaulting borrowers for the swift seizure of assets. This formidable legal authority is a tool that traditional MFIs do not possess and introduces a more adversarial and coercive dynamic into the lender-borrower relationship. Furthermore, MCBs would be permitted to secure loans with traditional forms of collateral, such as pledges and the hypothecation of assets. This represents a stark and fundamental departure from the group-based social collateral model that has historically defined microcredit, shifting the focus from community trust to individual asset ownership, which could exclude the poorest and most vulnerable clients.
This lopsided advantage extends directly to their ability to mobilize capital, which would create an insurmountable competitive gap. The proposed MCBs would be allowed to engage in full-fledged retail banking with the general public, not just their registered members. This authority would enable them to attract and mobilize vast public deposits, giving them a massive and inexpensive capital base that traditional MFIs could never hope to match. With this financial firepower, MCBs could offer significantly more competitive interest rates on both loans and savings products, effectively pricing community-focused MFIs out of the market. This creates a scenario where the largest and most commercially oriented MFIs might convert to MCBs, leveraging these advantages to absorb the market share of their smaller, non-profit counterparts, leading to a consolidation of the sector that prioritizes profit over social impact and ultimately leads to the extinction of smaller institutions.
The Inevitable Mission Drift
The creation of this hostile and uneven competitive landscape would likely force many MFIs to convert into banks not out of strategic choice, but simply as a matter of survival, triggering an inevitable and destructive “mission drift” across the sector. As these institutions transition from non-profit, development-oriented entities into profit-driven, regulated banks, their primary focus would naturally and necessarily shift from holistic community support to maximizing financial returns for shareholders. The very DNA of these organizations would be altered. The vital “plus” activities—community health, education, and disaster relief—that are currently funded by their operational surpluses would be the first casualties in the relentless pursuit of shareholder value. This is not a speculative risk but a predictable outcome of introducing commercial banking incentives into a socially motivated ecosystem. The end result would be a sector stripped of its social mission, leaving a void in community services that the formal banking system is neither equipped nor incentivized to fill.
This grim forecast is not merely theoretical; it is strongly supported by international precedent, with the experience of the CARD Bank in the Philippines serving as a particularly stark warning. In that case, a similar initiative to formalize and commercialize a large MFI saw the original mission of serving the poor become diluted over time as the institution grew and more powerful, profit-seeking investors took control. The result was the marginalization of the original small NGO-MFIs and the very borrowers the system was designed to empower. Applying this lesson to Bangladesh, a nation where the World Bank estimates 40% of the population remains below the poverty line and is increasingly vulnerable to climate shocks, the consequences of such a mission drift would be catastrophic. It would dismantle a proven, community-based support system at the precise moment when it is needed most, replacing it with a commercial model that is ill-suited to address the complex challenges of deep-seated poverty.
Broader Implications and a Pragmatic Alternative
The Loss of a Civil Society Pillar
A more profound and perhaps irreversible consequence of this proposed policy would be the erosion of the microfinance sector’s identity as a cornerstone of Bangladesh’s vibrant civil society. As the most successful and impactful MFIs are lured into converting into banks, they will be forced to shed their non-partisan, non-governmental status and integrate into the formal, commercial banking structure. This transformation would have severe repercussions that extend far beyond financial services. It would severely diminish their ability to raise funds from international donors, many of whom have mandates that specifically restrict funding to non-profit, civil society organizations. Furthermore, their crucial role as part of a broader, independent movement for democracy, human rights, and social justice would be compromised. By absorbing these institutions into the state-regulated banking system, the government would effectively neutralize a vital segment of civil society, weakening a key force for social progress and accountability.
This shift would also risk the loss of the unique visionary leadership that has been instrumental in the sector’s success. The proposal’s emphasis on “classical democratic” governance structures is seen by many practitioners as naive, as it ignores the pivotal role that charismatic, committed, and often unconventional founding leaders have played in the genesis and growth of highly successful MFIs like BRAC and ASA. These organizations were built on a specific vision and an organic, mission-driven culture that cannot be easily replicated or sustained by generic, externally imposed governance models. There is a well-documented phenomenon where such institutions begin to falter or collapse when control is handed over to outsiders who have not grown with the organization and do not share the founder’s deep-seated commitment to its social mission. The MCB proposal, by forcing a one-size-fits-all corporate structure, threatens to dismantle this invaluable leadership legacy.
A Vague Proposal with a Clearer Solution
Beyond its dangerous strategic implications, the draft ordinance itself is conceptually flawed and alarmingly vague on critical operational details. Key provisions, such as the plan for 60% of an MCB’s shares to be held by its borrowers, raise far more questions than they answer. The document provides no clear mechanism for how this ownership structure will be implemented, how profit-sharing will work for these borrower-shareholders, or whether the bank will function as a retail or a wholesale lender. The proposed linkage to the “social business” concept—where profits are meant to be reinvested into the enterprise—is also poorly defined, creating deep confusion about the financial returns that any shareholder, borrower or otherwise, could expect. This lack of clarity suggests a hastily constructed policy that has not been thoroughly considered, leaving the door open for ambiguity, exploitation, and ultimate failure.
Instead of introducing another layer of potentially weak and conceptually flawed institutions into an already “overbanked” nation, a far more prudent and pragmatic alternative exists. With 62 licensed banks already in operation, many of which are struggling with high rates of non-performing loans, the last thing the financial system needs is a new and untested category of banks. A more effective approach would be for the government to encourage existing, stable commercial banks to “open windows”—that is, to create specialized departments or dedicated programs designed specifically to provide stable, subsidized wholesale loans to the NGO-MFI sector. This solution would leverage the existing financial infrastructure, expertise, and stability of established banks to solve the sector’s very real capital access challenges. The analysis revealed that this approach avoided the disruptive and destructive consequences of the MCB proposal and presented a more robust, systemic fix that would strengthen, rather than dismantle, Bangladesh’s world-renowned microfinance ecosystem.
