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Microfinance: Lessons from Growth,Prospects in Crisis


H. I. Latifee



Introduction:

Microfinance has now become a worldwide movement. It has grown overtime with more and different types of actors getting involved in its development with new ideas and technologies and with different types of products and services. There has been diversification in its funding sources and instruments and also gradual shift towards commercialization. The number of microfinance institutions has increased globally and there is hardly any country in the world which has no microfinance program at all.

It is important to note what microfinance program means, how microfinance program has come so far, who took the initiative and with what motives. In fact, microfinance refers to programs that are poverty focused and that provide collateral free financial services to the poor for poverty reduction through the creation of self-employment and income.

Microfinance has come into operation as a private initiative and has grown almost unnoticed through a process of learning by doing. It is the inner urge that worked as a driving force for Professor Muhammad Yunus, who established Grameen Bank (GB) only to serve the poor and used microcredit as a poverty fighting tool. Both he and his bank won Nobel Peace Prize in 2006 for spearheading microcredit movement in the interest of building peace through poverty reduction and women empowerment. This has been the case with others also who started microfinance programs on their own.

Microfinance : Growth

The global outreach of microfinance is quite impressive. From a mere 7.6 million poorest families in 1997, the Microcredit Summit Campaign reported an outreach of more than 154 million clients by December 31, 2007. It included about 106 million poorest families when they started the program.

If we consider the growth of microfinance in Bangladesh and elsewhere, we observe that microfinance has experienced growth everywhere in terms of outreach, diversification of products, loan disbursement, generation of employment and mobilization of savings. It has deepened in terms of volume and its improvement has remained visible. It has expanded enormously in Bangladesh with a more pro poor strategy and sustainable operation. From a few hundred thousand borrowers in the late 1970s it has reached more than 49 million borrowers by December 2007.

Microfinance : Lessons

Whether it is GB in Bangladesh or GB replicators worldwide, whether it is microfinance in Bangladesh or microfinance in other countries, there are certain essential elements that are found to be responsible for the sustainable operation and continuous expansion of microfinance. As is evident, the growth of microfinance depends on the following:


  • Committed leadership

  • Professional staff

  • Appropriate credit delivery and recovery system

  • Trust based relationship

  • Good governance, participatory and decentralized management

  • Transparency

  • Flexibility

  • Effective Supervision

  • Diversified products

  • Trouble shooting and coping capacity

  • Enabling legal and regulatory environment

  • Deposit taking opportunity

  • Building social capital

  • Women as agents of change

  • Remaining innovative, client friendly and cost effective

  • Appropriate pricing

  • Introduction of cost reducing technology

  • Access to continuous and adequate funding

  • Strong MIS

  • Appropriate tools and strategies for risk control and management

  • Standardized accounting

  • Regular audit
As it appears, one of the main challenges of microfinance in expanding operation is to solve the problem of continuous financing which may come from deposits, equity, quasi equity, social and private investors, corporations, foundations, banks, wholesale funds and others. Deposits as a source of funding is always preferable. But all MFIs cannot accept deposits and use it for onlending purposes because of legal constraints. Non deposit taking MFIs are always dependant on others and suffer from uncertainty that affect their growth.

Grameen Bank could grow and remain committed to serve the poor under all situations (normal, natural disasters, economic and other crisis) because as a specialized banking institution it can mobilize deposits from all in the community whether poor or non- poor and whether they are borrowers of GB or not. GB finds the community as the ocean of money which if properly navigated not only provides enough funds but also creates grounds for rapid expansion. If all MFIs under clearly defined rules and conditions are allowed to mobilize deposits for onlending purposes, their dependency on donor and other sources of funds would have been considerably reduced. This would not only provide them with financial self-sufficiency but also increase their capacity to serve more poor.

The experiences of GB and others strongly suggest that given the access to adequate and timely funding including deposits, MFIs can reach the goal of serving people under extreme poverty without having to sacrifice their profitability. It is because microfinance is designed with poor in mind while at the same time it is founded on market principles of competitiveness, pricing and sustainability. In fact, poverty reduction and long term business considerations of microfinance reinforces each other, as the immediate and non-negotiable goal of microfinance is to reach the poorest and earning profitability is its directional and long term goal.

Microfinance : Prospects in Crisis

Microfinance as a part of financial sector is supposed to be affected directly or indirectly by the positive or negative changes that take place in the global or the regional financial markets. But due to its deep shock resistant roots and trust based relationships and operation, microfinance has the built-in capacity to protect itself from the devastating affects of financial crisis.

It may be asked why and how microfinance sector has got this shock resistant root. The answer is simple. Its work is location specific and pro poor. It serves the poor at their doorstep and supports their income earning activities. It is a real economy. It is not based on chasing papers.

In addition to credit, most of the MFI offer services like health, education, sanitation, housing etc. which increases the capacity of the clients as well as the institution itself. The culture of savings that the MFIs has developed amongst the clients is of great significance as it provides security, convenience, liquidity and returns to the poor savers. It also solves the problem of funding for the MFIs.

MFI clients use local inputs and produce goods for local market. They have no link with the global financial market. That is why the global credit crunch has no direct effect on them.
Unlike conventional banks, MFIs always stand by the side of their clients even when they face any disaster or crisis. They do not abandon their clients. Rather, they try their best to help their clients overcome the crisis.

How strong and deep rooted is the foundation of MFIs may be well understood from the fact that, there is no report so far that MFIs have asked for any bail out packages like big banks or other businesses from the governments.

It may be remembered that during the currency crisis in East Asia and the banking crisis in Latin America in the 1990s, microfinance institutions serving the poor performed better financially than mainstream banks. This was possible because the banking and currency crisis had little relevance to the subsistence based economies.

The world is now facing another financial crisis, which is very severe. Although in this crisis, the poor are subject to suffer due to private capital dry up, fall in aid, fluctuation in commodity prices and job loss, their sufferings is mitigated because of the robust presence of microfinance.

Microfinance has so far been immune to the global financial crisis. Given its commitment and concern for the people at the bottom and given its root in their heart, microfinance will survive the setbacks brought by the current financial crisis. It has the vast untapped markets of clients to serve. It bears more significance in times of recession as it shows laid off employees and unemployed persons a way for self-employment.

Given the complex nature of the current financial crisis and given the links of microfinance to the domestic and international financial markets, the question arises, how long microfinance will be able to remain unaffected. If the crisis continues, what will be future of the poor and the poverty focused microfinance programs? Will they continue to grow or slow down or even close down?

The effects may not be the same for all MFIs in all countries. The effects will vary depending on the nature of the economy, the status of the clients in terms of their income, expenditure, demand for microfinance and repayment capacity. It will also depend on the funding and interest structure of MFIs. The deposit taking MFIs like Grameen Bank who are relatively well-cushioned compared to those who rely on international funders will not be affected by the financial crisis. But for the non-deposit taking MFIs who are dependant on external funding, money will become more scarce and expensive as commercial investors have become more risk averse.

Under these circumstances, the governments and the socially responsible investors have important roles to play to enable microfinance programs continue and expand their operation and to become deposit taking institutions so that their dependency on commercial or cross border financing is less or zero.

It is encouraging to know that some national and international developing agencies have come forward with their rescue plan of providing liquidity to the MFIs. However, the real success of this rescue plan will depend on where the fund is going. Is it to serve the poorest or to help commercial financing which aims at maximizing profit rather than maximizing social benefit?

Conclusion :

Time has come for the microfinance industry to take the opportunity of this financial crisis to further demonstrate that it is socially committed, deep rooted and robust. Once again it will be proved that it can grow under all circumstances as it is trust based, it touches human life, it serves the people at their doorstep, it serves the local market, it operates on a sustainable basis and brings positive changes in the lives of its clientele.