PKSF signs loan agreement with ADB for microenterprise promotion

The Asian Development Bank (ADB) and the government on Tuesday signed an agreement worth $200 million in loans to strengthen microfinance in Bangladesh, supporting microenterprises, particularly owned by women and those located in regions with high climate risks.

Sharifa Khan, secretary, Economic Relations Division, and Edimon Ginting, country director, ADB, signed the agreement on behalf of their respective organisations, a release said.

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 the Palli Karma Sahayak Foundation (PKSF).

The project targets at least 80% of microenterprise borrowers to be owned or led by women, develop a business plan update and digitalisation roadmap for the PKSF, and a diagnostic review of its partner MFIs' operational costs to enhance their viabilities.

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

"Microenterprises are effective tools to generate employment, cut rural poverty, and reduce urban-rural economic disparities. Strengthening microfinance is critical for socio-economic recovery from the Covid-19 pandemic and revitalising the economy," said Edimon Ginting.

"This initiative builds on previous ADB support to the PKSF to further boost available funding for MFIs as well as encourage commercial bank funding by reducing perceived credit risks," added Mr Ginting.

To encourage commercial bank funding, the project will help pilot a credit guarantee fund at the PKSF that will cover the credit risk for small and medium-sized MFIs. This complements ADB's ongoing Microfinance Risk Participation and Guarantee Program under its private sector operations. 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 on-lend to microenterprises.

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 additional $50 million financing approved in 2020 to support microenterprises affected by the Covid-19 pandemic.