Microfinance goes beyond just providing business loans. The underprivileged use financial services not only for business investment in their micro enterprises but also to invest in health and education, to manage household emergencies and to meet the wide variety of other cash needs that they often encounter.
The enormous success of a few microfinance institutions (MFIs) speaks volumes about the difference that MFIs can bring about in the lives of the poor mass. Perhaps, the most well-known and studied MFI is the Grameen Bank of Bangladesh. Founded in 1976 by Nobel laureate Muhammad Yunus, it has been modeled by other MFIs around the world. As of December 2009, Grameen Bank reported 7.97 million borrowers, 97 percent of whom were women. The total funds dispersed by the bank since its inception is US$ 8.74 billion and it reports a loan recovery rate of 97 percent. To ensure repayment, the bank uses a system of “solidarity groups”. These small informal groups apply together for loans and its members act as co-guarantors of repayment and support one another’s efforts at economic self-advancement.
Evidence from the millions of microfinance clients around the world demonstrates that access to financial services enables poor people to increase their household incomes, build assets, and reduce their vulnerability to the crises that are so much a part of their daily lives.
It is a widely-accepted that microfinance in a poor country like Nepal is probably the best solution for poverty alleviation and inclusive growth. Reportedly, 31 percent of Nepal’s population lives below the poverty line and microfinance can play a vital role to raise the living standard of people at a faster rate. As per an informal source, among the total household of the country forming around 6 million, 1.9 million households live below the poverty line. Assuming average household microfinance requirement stands at Nepali rupees 25,000, the total microfinance requirement of the country is approximately 48 billion rupees. However, it is believed that the funding of these requirements from the various sources in the market maybe just about 10 billion.
In most cases, microfinance and MFIs are supported by grant funding. In order to achieve scale and viable business operations, we need capital infusion and funds/loans available in a larger and more organized manner.
Access to flexible, convenient, and affordable financial services empowers and equips the poor to make their own choices and build their way out of poverty in a sustained and self-determined way.
At present, commercial banks have been channelizing funds into microfinance to fulfill the mandatory requirement only. On the regulatory front, there is a requirement under “Deprived Sector Loan” (DSL), which states that 3 percent of net bank credit would have to be directed towards deprived sectors. Keeping in view the role played by MFIs in reaching the rural masses, NRB (Central Bank) has allowed bank lending to MFIs to be clubbed under DSL. Since the penalty for not reaching the DSL target by banks is stringent, banks offer debt funds at minimal and very competitive rates to MFIs. At present, the funding available through commercial banks from DSL source is approximately 7.5 billion rupees. However, a huge gap still exists between the required and available fund that could, to a great extent, be filled by a more proactive and sustained participation by commercial banks. Nevertheless, it needs to be kept in the back of our minds that commercial banks operate in a completely different environment from what one would witness in the case of microfinance sector where the needs, policies, capabilities, reach etc are very different.
The products and facilities offered by commercial banks are significantly large and primarily targeted at commercial businesses and individuals allowing the former to yield relatively higher returns on the capital employed. The smaller clients and those belonging to the poor rural mass are not entertained as the general perception exists that they do not have stable and viable source of income so as to substantiate cash flow for servicing their loans. Similarly, subsistence farmers also do not form the target market of commercial banks as they lack adequate collateral to guarantee their loans. In addition, the commercial banks do not have the reach and infrastructure for managing the marginal borrowers located at the remote places in the country.
On the other hand, MFIs capitalize on their local branch network and close proximity with their clients. The range of services offered by them includes loans, savings facilities, insurance, transfer payments, and even micro-pensions to the poor masses who cannot afford to enter the formal system of commercial banking.
MFIs employ staff from local population, possess extensive data about the clientele, have deeper relationship with the clients and can operate more efficiently than a commercial bank in that area.
Time is important for a rural, poor client as most of them depend on small businesses or daily wages and thus have a “hand-to-mouth existence”. To value this aspect on the client’s front, MFIs provide door step service. Such would not be a commercially-viable approach for commercial banks.
Financial Inclusion is a larger concept than microfinance business. MFIs with their network and contacts can play a very proactive role in furthering the Financial Inclusion agenda. Essentially, therefore, in the ecosystem of financial inclusion, both commercial banks and microfinance institutions must co-exist cohesively if one would like to achieve the goals set for financial inclusion.
In Nepal, microfinance is distributed primarily through MFIs (including micro credit banks, NGOs, cooperatives, etc), to help rural groups directly. The participation of commercial banks is limited to the role of a wholesale lender to the MFIs. MFIs also have access to the funding from donor agencies and government as well. In such a situation, it is imperative that MFIs and commercial banks work in tandem, complementing each other rather than competing with each other, and capitalize on each others position in the market. It would be more practical, efficient and effective to lend to the intermediaries (MFIs) who, in turn, would lend to the ultimate beneficiaries. MFIs thus can become extended arms of the banks to achieve the larger objective of financial inclusion, which banks find difficult to achieve solely.
Rural clients would like to have micro savings, micro credit, insurance and pension products from one source. So MFI can play a fiduciary role or a point of contact for a commercial bank with the rural masses. It would be a more commercially-viable proposition for commercial banks to approach the rural mass through MFIs rather than opening their own branches.
Other measures could include providing “Business Correspondent” status to MFIs. This would help banks distribute their products and services to the masses through these MFIs who have a large advantage in terms of their network outreach.
In view of the above, it is strongly felt that rather than competing with each other, a collaborative approach would be a win-win situation for both commercial banks and MFI’s as commercial banks are looking for a footprint while MFI’s for source of funding. Microfinance can contribute significantly to enhancing the overall economic development of a country. At the same time, reaching out to the rural masses provides great business opportunities. Banks and MFIs can have a complimentary role in harnessing this opportunity and at the same time help accelerate an inclusive economic growth for the country.
(Writer is CEO, Standard Chartered Bank Nepal Ltd.)
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