The tangible collateral is substituted by group guarantee, peer pressure, intensive supervision, and access to more frequent and bigger loans if repayment performance is satisfactory.

Worldwide, micro-credit has been considered a development approach and very effective for poverty alleviation. It has been considered a champion of human rights as well.

But conventional banks do not lend to the poor. Banks require collateral and have complicated procedures that the poor cannot satisfy. Before the emergence of micro-credit, the poor people used to be exploited by the money-lenders and traders who operate a system of usury in villages.

So, micro-credit emerged mainly for two reasons: a) due to the inadequacy of growth-based development strategy to alleviate poverty (i.e. state failure), and b) the deficiency of rural credit systems to address the credit need of the poor (i.e. market failure).

Micro-credit is designed to serve two main objectives, i.e. poverty alleviation and empowerment. Perhaps no other development tool has attracted so much global attention in the history of poverty-focused development efforts than micro-credit.

The beneficiaries of micro-credit programs are those who do not have access to formal credit market. Most important aspect of this program is that 90% of the micro-credit beneficiaries are women. Micro-finance has created huge employment opportunities having considerable positive impact on the economy.

Service provision of Micro-Finance Institutions (MFIs) may be grouped under two approaches, i.e. minimalist approach (provision of only financial services) and integrated approach (provision of financial intermediation, social intermediation, enterprise development support and social development services).

MFIs are basically semi-formal organizations, not formal like commercial banks, and again not informal like those that are operated by registered NGOs.

Most MFIs in Bangladesh are NGO registered under the Voluntary Social Welfare Agencies Ordinance 1961, Societies Act of 1860, The Foreign Donation (Voluntary Activities) Regulation Ordinance 1978, and The Foreign Contribution (Regulation) Ordinance 1982, exempting them from central bank oversight.

Most of these have a donor-funded loan pool and hold members' deposits in a low-risk investment portfolio to pay interest on their savings. A few of them are the partner organizations of Palli Karma-Sahayak Foundation (PKSF), an apex organization that provides loans to its MFI partners at a minimum interest rate.

There is a debate going on regarding the commercial banks having to pay full tax on their profit whereas the NGOs do not have any obligation to pay tax. The government basically imposes tax with two aims, i.e. to meet the revenue expenditure (maintenance of various government agencies including armed forces) and to meet the development expenditure for pro-poor growth.

MFIs are also doing the same development activities. The MFIs are basically not-for-profit. The profit they earn through micro-finance operation is not shared/distributed among the board members/trustees; rather they reinvest their earning in other sectors or among other poor borrowers and lend their earnings to other poor people.

If tax is imposed on MFIs, there are chances of leakages in terms of collection and investment for further development. In addition, administrative cost for tax collection from MFIs is also to be taken into consideration. Again, if the MFIs are charged with taxes, a few of them may hide their actual profit. So, tax imposition will hinder the progress of the MFIs.

Then they have to compete with the commercial banks in terms of additional expenditure due to imposed tax, and perhaps to meet these additional expenses, MFIs have to also increase the interest rate, directly affecting the poor borrowers.

Micro-credit is not the only solution for poverty alleviation; rather it is one of the major interventions. This sector is now a very important financial sub-sector involved in poverty alleviation. Any major problem in this sector due to lack of any appropriate regulation will have serious adverse impact on the economy and poverty alleviation efforts.

The government has already done a praiseworthy job by enacting a legislation to bring the operation of MFIs under a regulatory framework. A regulatory commission is to be formed to oversee the micro-finance activities and to give protection to individual depositors from fraud and mismanagement by MFIs, as the poor people do not have adequate information or expertise to evaluate those risks.

But in the name of regulating it, the commission must not hinder the progress of MFIs; rather, it should facilitate them. Only expert professionals should be employed in a commission like PKSF; and it should be always kept outside the bureaucratic control.

Finally, the suitable MFIs may be allowed, upon consideration, to operate in rural areas as standard commercial banks, so that they can mobilize savings from the depositors in order to reduce dependency on donors and to boost their own sustainability.

Khan Ferdousur Rahman is a freelance contributor to The Daily Star.