Issues in microfinance programmes
Saturday, 17 November 2007
Dr. Salehuddin Ahmed concluding his two-part article
AUTONOMOUS Microcredit Apex/Wholesale Funds (MAFs) are a special kind of apex or second-tier funding institution that provides loans to "retail" microcredit programs (MCPs) for on-lending to borrowers. They receive their funds, at least initially, as grants from government and private institutions with an interest in alleviating poverty through microcredit. They also provide loans and training for institutional development to MCPs, and can play a role in initiating a self-regulatory regime to oversee the growth of the field in a country.
A major advantage of autonomous microcredit funds is their ability to screen and monitor microcredit programmes according to standard criteria, compared to inconsistent "ad hoc" criteria imposed on individual MCPs by donor and government agencies. Funding and support based on uniform standards that are not influenced by politics effectively create a level playing field, while standard monitoring requirements contribute to more professional MCPs.
The core objective of the national MAFs should be "reaching the poor, and especially the poorest, with financial services through sustainable MCPs under viable institutional arrangements." While national microcredit apex funds (MAFs) may engage in providing a number of diverse services to promote development of MCPs in their respective areas of operation, two major functions should be focused on: financial intermediation and development of sustainable institutions.
Palli Karma-Sahayak Foundation (PKSF) in Bangladesh, since its establishment in May 1990 by the Government, has been working as an apex microcredit and capacity building organisation for eradicating poverty initially in the rural areas and subsequently in urban areas.
The basic operational strategies of PKSF (Rural Employment Support Foundation) are the following:
l It does not directly lend money to the landless and the assetless people rather reaches its target groups through its Partner Organisations (POs);
l It provides greater thrust to institutional development, both its own capacity as an apex organisation as well as the capacities of POs;
l It favours no particular model; instead, innovations and different approaches based on experience are encouraged;
l It acts as an advocate for appropriate policies and regulations useful for the microcredit sector.
As of September 2006, PKSF has disbursed a total amount of about US$ 548.18 million among 7.0 million poor borrowers about 92% of whom are women. PKSF's loan recovery rate is over 99%. Independent evaluation studies have shown that PKSF's microcredit programme implemented through its POs has helped alleviation of poverty.
PKSF working in Bangladesh, the largest apex fund in the world, has successfully contributed to the growth and achievements of microcredit in Bangladesh. Similar organisations like the Pakistan Poverty Alleviation Fund (PPAF) in Pakistan, Rural Microcredit Development Corporation (RMDC) in Nepal, National Development Trust Fund (NDTF) in Sri Lanka, FONCAP in Argentina, Local Initives Department (LID) in Bosnia-Herzegovina and Peoples' Credit and Finance. Corporation (PCFC) in the Philippines are some success stories of apex fund around the globe.
Major Issues: Targeting the Poorest Versus Achieving Financial Sustainability: The Dilemma in Microcredit; Normally, the MFIs have been successful in expanding their outreach by providing microcredit to increasing numbers of borrowers who are near the poverty line, not well below that. The MFIs adopt this approach to reach financial viability within a reasonable time frame. If the MFIs are to borrow (from PKSF and other sources) at a rate close to market rate of interest, the effort to increase outreach by including the poorest and reach financial viability as well may become difficult and delayed. The partner organisations (POs) of PKSF have achieved financial viability at the present (subsidised) rate of service charge of PKSF. Therefore, in the context of Bangladesh there seems to be a trade-off between outreach and sustainability of MFIs and they should strike a judicious balance between the two which may enable them to achieve financial sustainability.
Experiences suggest that the financial needs of the poor are best served by encouraging a broad range of institutions to provide efficient and responsive lending, savings, insurance, and other financial services that poor people need to build their business, increase income and assets, and reduce risks. Poor people need sustained access to an evolving set of financial products and services. These can only be provided by financially sustainable institutions, dealing with diverse segments and products, each in the position to increase outreach and grow with their clients.
Widening the Target Group: New Products and New financial Technologies: The MFIs have some scope to expand horizontally-devising ways to include more people from the target group. More important is, as older borrowers graduate to higher income brackets, new products need to be devised to meet their changing needs. These new products may also help the MFIs to expand vertically by tapping borrowers outside the target group. A possible way to expand horizontally is to include more men. Research in Bangladesh and elsewhere show that men usually borrow larger amount. However, their repayment record is not as good as women. Including more men will allow MFIs to attain sustainability quickly, but it will also mean that the repayment performance of an institution will suffer as well. As the microcredit movement matures it faces the varied requirements of the borrowers and the need to offer a larger package of products.
Accessing Non-Donor Source of Financing: It is fair to say that donor funding and enthusiasm for microcredit will diminish in the future. This means that MFIs have to look for new avenues to find their activities, potential source of fund will be to mobilise saving deposits of members and non-members. Another alternative is to try to tap commercial source of funding such as commercial banks, the local stock market and financial market. This option might be open only to large and well-established MFIs and may not be feasible for small MFIs.
Internal and External Governance Issues: Research in Bangladesh and other places show that a crucial element for the success of a credit granting NGO-MFI is the quality of leadership and management. The governance of NGOs is increasingly being discussed nowadays. Research findings indicate that governance and financial sustainability are closely interrelated. Weak governance and management characterise many microfinance NGOs in Bangladesh. It is commonplace to find friends, close relatives, retired bureaucrats, and such other persons in the governing bodies. They are mere onlookers and remain uninvolved with the board's business. The chief executives are said to overpower the boards. If this is the situation, good governance will not occur by just inducting good people in the governing body. The essence of governance is to ensure an overall system of structuring accountability and transparency in an organisation.
Sustainability of Microcredit Borrowers: An individual member may be considered as sustainable when he/she is capable of meeting the basic needs of his/her family without borrowing money/capital from the project or any other sources like banks etc., for consumption purposes. However, loans can be taken for IGAs.
Most people are of the opinion that a member's sustainability should be judged by two separate but inter-dependent criteria, viz, (i) social development and (ii) economic development. Controversies, however, exit as to which of the two criteria should go first. Some people argue that economic development is a pre-condition for social development while some others consider social development as a prerequisite for economic development. Most people, however, are of the opinion that the two interactive and therefore be pursued simultaneously. Sustainability of borrowers is also linked with some programme challenges of MFIs, like devising appropriate micro insurance schemes and social protection schemes, providing other financial services to the poor,
Service Charge of NIFIs: The MFIs in Bangladesh usually charge flat rate of 12 to 15% per annum from the microcredit borrowers. The effective rate becomes about 20 to 28% at the borrowers' level. Recently, there has debate whether this rate is too high or not. The critics of service charges of MFIs compare, somewhat erroneously, with interest rates of the conventional formal banking system. Microcredit is "banking at the doorstep" of the poor borrowers. The monitoring and supervision are quite intensive and costly. Therefore, the comparison with formal banks is not proper. There are several other factors like risks associated with collateral free loan, provisioning for doubtful and bad loans, compulsion to build up MFI's equity and attaining financial sustainability also are determinants of service charge of microcredit programmes, Bangladesh microcredit sector has relatively lower rate of service charge compared to many other countries. However, social obligations, political realities and credit at a competitive rate may require consideration of reducing the rate by MFIs. But that should not be done by resorting to capping the rate. The actions to increase efficiency in the credit operation of MFIs, information flow at grassroots level regarding charges of various MFIs, increasing the loan size for the borrowers and healthy competition among MFIs may lead to competitive rates acceptable to all concerned.
Regulatory Framework: This issue has come to the forefront because MFIs are providing financial services and products to the poor, outside the formal banking system.
In view of the history of MFIs (most of which are NGOs), it can be argued that the conventional regulatory framework such as that of formal banks and financial institutions is not appropriate and hence not required under the circumstances prevailing in many countries. This is particularly in view of the fact that many MFIs are not accepting deposits with checking facilities. The unique features of MFIs in the field of social and financial services with the core objectives of poverty alleviation differentiate the industry from the formal financial sector and further justify this proposition. However, that does not in any way downplay the importance of having some strategic monitoring measures that are compatible and appropriate to MFIs' objectives, institutional operation and development culture.
Keeping this in mind the government of Bangladesh formed an Unit 'Microfinance Research and Reference Unit (MRRU)' in 2000 under the supervision of a National Steering Committee headed by the Governor of the Bangladesh Bank to formulate some guidelines and suggest a regulatory framework for this sector. Initially this Committee prepared a set of guidelines which were implemented by the Unit. Those guidelines helped the sector to get prepared for future regulatory environment that would be in place and to build up a friendly communication between the sector and the policy makers. At later stage, the Committee prepared a draft of a regulatory framework after consultation with the sector representatives and submitted that draft to the government for final approval. The government passed the law, 'Microcredit Regulatory Authority Act 2006' in July 2006 on the basis of those suggestions given by the Committee. Under this law the government has established a separate Microcredit Regulatory Authority (MRA) and constituted its Board of Directors with the Governor of the Bangladesh Bank as the Chairperson.
According to this new law, all active MFIs can apply for license from the Authority immediately. No MFIs will be allowed to work within the country without getting license from the Authority. According to the Law, all institutions who have microcredit operation should separate their financial operations from other development works and keep their accounts separate. The Authority has been given power to monitor and supervise all these MFIs who will get license from it.
The Authority also has the power to prepare detail rules related to the operations of microcredit including conditions for spending any income, area of operations, guideline of internal and external audit of accounts, collection of deposits, and use of earned profit etc. The Authority has the mandate to take punitive measures if any institution does not comply with any of the provisions of law and rules. The former MRRU has been transformed into a Secretariat of the Microcredit Regulatory Authority. Applications for license have already been received from many MFIs for license and MRA has already issued licenses to several MFIs. Preparation of other rules based on the law is under process.
It is expected that microcredit sector of Bangladesh will be under an accountable and transparent systems in near future and all licensed MFIs will be working in an environment of fair competition which will ultimately benefit the final beneficiaries, the poor people of the country who largely remains out of the benefit of formal financial market.
Conclusion: Microcredit, originated in Bangladesh has spread all over the globe. Today within the global coverage of microcredit Bangladesh's achievement stands out prominently. According to the Microcredit Summit Campaign Report 2006 about 82 million poorest clients have been reached by microcredit in 2005 around the world. Out of that 74 million poorest clients are in Asia and the Pacific Region. Bangladesh alone covered 10.74 million poorest clients (14%). The Poverty Reduction Strategy Paper (PRSP) of the government of Bangladesh has (Unlocking
Potential: National Strategy for Accelerated Poverty Reduction outlined some important roles for microcredit. The policy makers have recognised the importance of microcredit in Bangladesh and have pledged their support, to this programme.
With combined efforts of the governments, MFIs, donor agencies and above all the peoples of the nations through multi pronged approach poverty will be removed form the face of the earth and thus peace in its true sense will be restored around the world.
As the microcredit movement matures, we get a clearer idea of what its strengths are and what are its limitations. To move forward, we need to be more effective, and increase outreach, design products to include the poorest, and also provide finance for growth and employment oriented small and medium enterprises (SMEs) which are needed to spread the poverty alleviation net wider, so that significant decline in poverty takes place. We also need to have transparency in the management systems of the microfinance institutions and prepare for the eventuality of decreased donor funding and, move towards sustainability.
The writer is the Governor, Bangladesh Bank. Concluded
AUTONOMOUS Microcredit Apex/Wholesale Funds (MAFs) are a special kind of apex or second-tier funding institution that provides loans to "retail" microcredit programs (MCPs) for on-lending to borrowers. They receive their funds, at least initially, as grants from government and private institutions with an interest in alleviating poverty through microcredit. They also provide loans and training for institutional development to MCPs, and can play a role in initiating a self-regulatory regime to oversee the growth of the field in a country.
A major advantage of autonomous microcredit funds is their ability to screen and monitor microcredit programmes according to standard criteria, compared to inconsistent "ad hoc" criteria imposed on individual MCPs by donor and government agencies. Funding and support based on uniform standards that are not influenced by politics effectively create a level playing field, while standard monitoring requirements contribute to more professional MCPs.
The core objective of the national MAFs should be "reaching the poor, and especially the poorest, with financial services through sustainable MCPs under viable institutional arrangements." While national microcredit apex funds (MAFs) may engage in providing a number of diverse services to promote development of MCPs in their respective areas of operation, two major functions should be focused on: financial intermediation and development of sustainable institutions.
Palli Karma-Sahayak Foundation (PKSF) in Bangladesh, since its establishment in May 1990 by the Government, has been working as an apex microcredit and capacity building organisation for eradicating poverty initially in the rural areas and subsequently in urban areas.
The basic operational strategies of PKSF (Rural Employment Support Foundation) are the following:
l It does not directly lend money to the landless and the assetless people rather reaches its target groups through its Partner Organisations (POs);
l It provides greater thrust to institutional development, both its own capacity as an apex organisation as well as the capacities of POs;
l It favours no particular model; instead, innovations and different approaches based on experience are encouraged;
l It acts as an advocate for appropriate policies and regulations useful for the microcredit sector.
As of September 2006, PKSF has disbursed a total amount of about US$ 548.18 million among 7.0 million poor borrowers about 92% of whom are women. PKSF's loan recovery rate is over 99%. Independent evaluation studies have shown that PKSF's microcredit programme implemented through its POs has helped alleviation of poverty.
PKSF working in Bangladesh, the largest apex fund in the world, has successfully contributed to the growth and achievements of microcredit in Bangladesh. Similar organisations like the Pakistan Poverty Alleviation Fund (PPAF) in Pakistan, Rural Microcredit Development Corporation (RMDC) in Nepal, National Development Trust Fund (NDTF) in Sri Lanka, FONCAP in Argentina, Local Initives Department (LID) in Bosnia-Herzegovina and Peoples' Credit and Finance. Corporation (PCFC) in the Philippines are some success stories of apex fund around the globe.
Major Issues: Targeting the Poorest Versus Achieving Financial Sustainability: The Dilemma in Microcredit; Normally, the MFIs have been successful in expanding their outreach by providing microcredit to increasing numbers of borrowers who are near the poverty line, not well below that. The MFIs adopt this approach to reach financial viability within a reasonable time frame. If the MFIs are to borrow (from PKSF and other sources) at a rate close to market rate of interest, the effort to increase outreach by including the poorest and reach financial viability as well may become difficult and delayed. The partner organisations (POs) of PKSF have achieved financial viability at the present (subsidised) rate of service charge of PKSF. Therefore, in the context of Bangladesh there seems to be a trade-off between outreach and sustainability of MFIs and they should strike a judicious balance between the two which may enable them to achieve financial sustainability.
Experiences suggest that the financial needs of the poor are best served by encouraging a broad range of institutions to provide efficient and responsive lending, savings, insurance, and other financial services that poor people need to build their business, increase income and assets, and reduce risks. Poor people need sustained access to an evolving set of financial products and services. These can only be provided by financially sustainable institutions, dealing with diverse segments and products, each in the position to increase outreach and grow with their clients.
Widening the Target Group: New Products and New financial Technologies: The MFIs have some scope to expand horizontally-devising ways to include more people from the target group. More important is, as older borrowers graduate to higher income brackets, new products need to be devised to meet their changing needs. These new products may also help the MFIs to expand vertically by tapping borrowers outside the target group. A possible way to expand horizontally is to include more men. Research in Bangladesh and elsewhere show that men usually borrow larger amount. However, their repayment record is not as good as women. Including more men will allow MFIs to attain sustainability quickly, but it will also mean that the repayment performance of an institution will suffer as well. As the microcredit movement matures it faces the varied requirements of the borrowers and the need to offer a larger package of products.
Accessing Non-Donor Source of Financing: It is fair to say that donor funding and enthusiasm for microcredit will diminish in the future. This means that MFIs have to look for new avenues to find their activities, potential source of fund will be to mobilise saving deposits of members and non-members. Another alternative is to try to tap commercial source of funding such as commercial banks, the local stock market and financial market. This option might be open only to large and well-established MFIs and may not be feasible for small MFIs.
Internal and External Governance Issues: Research in Bangladesh and other places show that a crucial element for the success of a credit granting NGO-MFI is the quality of leadership and management. The governance of NGOs is increasingly being discussed nowadays. Research findings indicate that governance and financial sustainability are closely interrelated. Weak governance and management characterise many microfinance NGOs in Bangladesh. It is commonplace to find friends, close relatives, retired bureaucrats, and such other persons in the governing bodies. They are mere onlookers and remain uninvolved with the board's business. The chief executives are said to overpower the boards. If this is the situation, good governance will not occur by just inducting good people in the governing body. The essence of governance is to ensure an overall system of structuring accountability and transparency in an organisation.
Sustainability of Microcredit Borrowers: An individual member may be considered as sustainable when he/she is capable of meeting the basic needs of his/her family without borrowing money/capital from the project or any other sources like banks etc., for consumption purposes. However, loans can be taken for IGAs.
Most people are of the opinion that a member's sustainability should be judged by two separate but inter-dependent criteria, viz, (i) social development and (ii) economic development. Controversies, however, exit as to which of the two criteria should go first. Some people argue that economic development is a pre-condition for social development while some others consider social development as a prerequisite for economic development. Most people, however, are of the opinion that the two interactive and therefore be pursued simultaneously. Sustainability of borrowers is also linked with some programme challenges of MFIs, like devising appropriate micro insurance schemes and social protection schemes, providing other financial services to the poor,
Service Charge of NIFIs: The MFIs in Bangladesh usually charge flat rate of 12 to 15% per annum from the microcredit borrowers. The effective rate becomes about 20 to 28% at the borrowers' level. Recently, there has debate whether this rate is too high or not. The critics of service charges of MFIs compare, somewhat erroneously, with interest rates of the conventional formal banking system. Microcredit is "banking at the doorstep" of the poor borrowers. The monitoring and supervision are quite intensive and costly. Therefore, the comparison with formal banks is not proper. There are several other factors like risks associated with collateral free loan, provisioning for doubtful and bad loans, compulsion to build up MFI's equity and attaining financial sustainability also are determinants of service charge of microcredit programmes, Bangladesh microcredit sector has relatively lower rate of service charge compared to many other countries. However, social obligations, political realities and credit at a competitive rate may require consideration of reducing the rate by MFIs. But that should not be done by resorting to capping the rate. The actions to increase efficiency in the credit operation of MFIs, information flow at grassroots level regarding charges of various MFIs, increasing the loan size for the borrowers and healthy competition among MFIs may lead to competitive rates acceptable to all concerned.
Regulatory Framework: This issue has come to the forefront because MFIs are providing financial services and products to the poor, outside the formal banking system.
In view of the history of MFIs (most of which are NGOs), it can be argued that the conventional regulatory framework such as that of formal banks and financial institutions is not appropriate and hence not required under the circumstances prevailing in many countries. This is particularly in view of the fact that many MFIs are not accepting deposits with checking facilities. The unique features of MFIs in the field of social and financial services with the core objectives of poverty alleviation differentiate the industry from the formal financial sector and further justify this proposition. However, that does not in any way downplay the importance of having some strategic monitoring measures that are compatible and appropriate to MFIs' objectives, institutional operation and development culture.
Keeping this in mind the government of Bangladesh formed an Unit 'Microfinance Research and Reference Unit (MRRU)' in 2000 under the supervision of a National Steering Committee headed by the Governor of the Bangladesh Bank to formulate some guidelines and suggest a regulatory framework for this sector. Initially this Committee prepared a set of guidelines which were implemented by the Unit. Those guidelines helped the sector to get prepared for future regulatory environment that would be in place and to build up a friendly communication between the sector and the policy makers. At later stage, the Committee prepared a draft of a regulatory framework after consultation with the sector representatives and submitted that draft to the government for final approval. The government passed the law, 'Microcredit Regulatory Authority Act 2006' in July 2006 on the basis of those suggestions given by the Committee. Under this law the government has established a separate Microcredit Regulatory Authority (MRA) and constituted its Board of Directors with the Governor of the Bangladesh Bank as the Chairperson.
According to this new law, all active MFIs can apply for license from the Authority immediately. No MFIs will be allowed to work within the country without getting license from the Authority. According to the Law, all institutions who have microcredit operation should separate their financial operations from other development works and keep their accounts separate. The Authority has been given power to monitor and supervise all these MFIs who will get license from it.
The Authority also has the power to prepare detail rules related to the operations of microcredit including conditions for spending any income, area of operations, guideline of internal and external audit of accounts, collection of deposits, and use of earned profit etc. The Authority has the mandate to take punitive measures if any institution does not comply with any of the provisions of law and rules. The former MRRU has been transformed into a Secretariat of the Microcredit Regulatory Authority. Applications for license have already been received from many MFIs for license and MRA has already issued licenses to several MFIs. Preparation of other rules based on the law is under process.
It is expected that microcredit sector of Bangladesh will be under an accountable and transparent systems in near future and all licensed MFIs will be working in an environment of fair competition which will ultimately benefit the final beneficiaries, the poor people of the country who largely remains out of the benefit of formal financial market.
Conclusion: Microcredit, originated in Bangladesh has spread all over the globe. Today within the global coverage of microcredit Bangladesh's achievement stands out prominently. According to the Microcredit Summit Campaign Report 2006 about 82 million poorest clients have been reached by microcredit in 2005 around the world. Out of that 74 million poorest clients are in Asia and the Pacific Region. Bangladesh alone covered 10.74 million poorest clients (14%). The Poverty Reduction Strategy Paper (PRSP) of the government of Bangladesh has (Unlocking
Potential: National Strategy for Accelerated Poverty Reduction outlined some important roles for microcredit. The policy makers have recognised the importance of microcredit in Bangladesh and have pledged their support, to this programme.
With combined efforts of the governments, MFIs, donor agencies and above all the peoples of the nations through multi pronged approach poverty will be removed form the face of the earth and thus peace in its true sense will be restored around the world.
As the microcredit movement matures, we get a clearer idea of what its strengths are and what are its limitations. To move forward, we need to be more effective, and increase outreach, design products to include the poorest, and also provide finance for growth and employment oriented small and medium enterprises (SMEs) which are needed to spread the poverty alleviation net wider, so that significant decline in poverty takes place. We also need to have transparency in the management systems of the microfinance institutions and prepare for the eventuality of decreased donor funding and, move towards sustainability.
The writer is the Governor, Bangladesh Bank. Concluded