Microfinance: Escape from poverty or into a deeper hole?
Tuesday, 14 December 2010
The microfinance industry in India is not reportedly going great. Following some untoward incident in some central and southern states, the Government of India is revisiting the entire framework around microfinance. The incriminations and charges have somehow crossed the boundaries and deemed to have affected the image of the microfinance industry in Bangladesh too. Despite the fact that India and Bangladesh are neighboring countries with similar social and cultural commonalities, it must be considered that the recent financial crisis left Bangladesh almost untouched compared to India. As such it should not be construed that what has happened to India must happen in Bangladesh as well. There are three major differences between Bangladesh and India micro finance institutions(MFI’s):
Firstly 90% of the entire MFI loan portfolio of India is provided by for-profit MFIs compared to the entire loan portfolio being provided by not-for- profit social organizations in Bangladesh. This fact alone reduces the chance of Bangladeshi MFIs trying to bleed the poor in order to make the owners /lenders richer. The MFI’s in Bangladesh are able to plough back their earning into providing educational and health services to the poor besides the financial service of providing loans. There is not much scope of siphoning out huge sums of money for personal gain.
The MFI industry in Bangladesh has been brought under the purview of a regulatory authority- Micro-Credit Regulatory Authority(MRA) unlike the ones in India where so far the RBI has been regulating only a few large MFIs, then also not extensively.
In the last few years as per the mix market data India has been growing at 50% and above in term of GLP(gross loan portfolio)compared to Bangladesh which even had a negative growth in some of these years. This data alone denotes the Indian MFI industry is in the growth stage compared to Bangladesh which is at a more stable growth phase.
Bangladesh micro-finance sector is regarded as not only the pioneer but also the largest and most efficient in the world. We should not forget that microfinance in Bangladesh is regarded very highly around the globe because of their huge contributions to the society, especially `at the bottom of the pyramid’. Many of us fail to appreciate this industry’s contribution in helping people to stay above poverty line despite three cyclones in three years, the huge growth in self confidence among women in villages and the up scaling of micro business to small businesses. People at times also fail to appreciate that the microfinance industry took financial services to the poor’s doorstep that the larger financial sector was not able to do. Microfinance industries have also tried to create social enterprises to accommodate the products produced by micro borrowers creating a demand. These successes have been honored by a Noble Peace Prize and a Knighthood.
We lead the global microfinance industry both in terms of its sheer size and productivity. According to the Microfinance Information Exchange (MiX) analysis report on Asia for 2009 Bangladesh caters to 22.8 Million borrowers compared to their Indian counterpart of 16 million and the whole of Asia of 57.6 million. Out of this huge borrower base in Bangladesh Grameen Bank (8 million) , BRAC ( 6.2 million) & ASA (5.6 million) encompass 87% of the entire Bangladeshi portfolio. Considering the size of the population of Bangladesh is 160 million and 36.3% below poverty line there are more grounds to cover. Bangladesh also has a gross loan portfolio of USD 2.5 billion compared to the entire South Asia of USD 4.7billion. Despite the large numbers, the cost per borrower for Bangladesh is much lower than other Asian countries.
Bangladeshi microfinance institutions have advanced from being development partner-supported entities towards almost self-sufficient institutions supported by some commercial financing. But still majority of the financing remains from donors. A majority of the loan portfolio of the MFIs is targeted towards agriculture. The present government is also very pro-poor and the central bank has directed all banks to provide credit directly to agri-business or through MFI-linkage(where there is no bank branches) at competitive rates. The directive was followed by a few large syndicated fund raising in the market for the MFIs.
However, the primary sources of financing for smaller MFIs still remain members’ deposits and Palli-Karma Sahayak Foundation (PKSF) funds. MFIs in Bangladesh cannot offer regular deposit/ savings service. Hence, they have to rely primarily on forced savings collected as a condition for membership or for access to loans. Some analysts argue whether donor support is a barrier for the microfinance sector to integrate into the mainstream financial sector.
A survey titled “Microfinance Banana Skins 2009,” sponsored by Citi Foundation, identified the risks to the business in light of the recent economic crisis. The survey was followed by a roundtable in Bangladesh, which concluded that the risks for Bangladesh MFIs are still comparatively lower than in India, Pakistan and some developed states. The three major risks identified were rising credit risks resulting from competition and lack of MIS, eroding image, and absence of succession plan.
Credit disbursements of MFIs used to be considered risk-free because of the high recovery rate compared to banks. But the loan recovery rate has been declining worldwide in the backdrop of the global financial crisis. It has to be taken into consideration that the crisis is likely to increase credit risk due to economic slowdown. Many microfinance clients live close to the edge and are perilously exposed to worsening economic conditions.
The economic crisis hit microfinance at a time when credit quality had already been deteriorating for reasons linked to the intensely competitive nature of the industry and a more calculating attitude to debt among borrowers. The concern is that the crisis will cause these unwelcome trends to accelerate.
Competition has led to an erosion of lending standards as lenders fight for market share and borrowers accept easy credit. This is evident from the shift from group lending to riskier individual lending. There is no clear data source to identify what the actual level of multiple borrowing for the industry or the Portfolio At Risk (Par) is. Nonetheless there is a general agreement that there is multiple borrowing but a point to ponder remains that despite the entire cry worldwide about multiple borrowing how much has it affected Bangladesh MFI’s? Most critics claim that there is huge multiple borrowing and poor people borrow from one MFI to pay-off another. But we are all aware that the borrower needs to pay a small amount every week to the MFI and there is not a one-off payment to the MFI’s. Thus the borrower is either investing in business or spending it for personal purposes. If they are doing the previous then it is good news because they will soon be migrating into a small enterprise. But if the borrower is doing the later then the NPA of the industry should have increased in leaps and bounds which the data available does not support so far.
Monitoring of credit quality is thus a problem due to lack of reporting. Except for the larger few, most MFIs do not follow international reporting standards. Calculation of delinquent loans by few MFIs remains obscure. Monitoring borrowers who do not have any identification number or track record is a mammoth task. The MFIs are currently trying to integrate the information contained in the national ID cards but system support is quite inadequate.
In the absence of any official database, MFIs have to maintain their own records of micro-borrowers and also social information due to their development orientation. Therefore, there exists a crying need for a strong and effective databank of micro-borrowers.
The second risk identified is the eroding image of the MFIs, who used to be perceived as philanthropic institutions, but their commercial operations have raised questions about their true agenda. In reality, compared to commercial banks, the operational and monitoring costs of MFIs, working in areas where commercial banks would never provide coverage, is far greater. Surprisingly, the rates charged by MFIs are still lower than the interest rates charged from unsecured credit card holders by commercial banks.
The third but most worrisome risk relates to the depth of management in the MFI sector. Whether they be large or small, MFIs are mostly operated like a family-run business with decision-making concentrated in the hands of a key person. Historically, people with good academic and professional backgrounds have refrained from joining the industry due to skepticism about the business model and social acceptance issues. Thus, the second-tier management and/or succession planning has remained hugely underdeveloped over the years.
Now that Bangladesh has established the Micro-credit Regulatory Act 2006 and a Micro-credit Regulatory Authority, we expect uniform reporting requirements and performance assessment procedure, proper policy guidelines, a central database of micro-borrowers, and active support for MFIs to become more vibrant for the greater interest of social and economic emancipation.
The micro-finance industry is now at a crossroads, and to take it to the next trajectory we have to increase our standards of reporting as well as processing, ensure wider coverage with timely recovery, integrate micro-finance into the mainstream financial system and, in the process, set global standards for others to follow. It is also time to take a more positive approach to the microfinance industry so that it remains a means to bring about financial Inclusion for the broader mass.
......................................................
Mamun Rashid is a banker and economic analyst. He can be reached at:mrashid1961@gmail.com
Firstly 90% of the entire MFI loan portfolio of India is provided by for-profit MFIs compared to the entire loan portfolio being provided by not-for- profit social organizations in Bangladesh. This fact alone reduces the chance of Bangladeshi MFIs trying to bleed the poor in order to make the owners /lenders richer. The MFI’s in Bangladesh are able to plough back their earning into providing educational and health services to the poor besides the financial service of providing loans. There is not much scope of siphoning out huge sums of money for personal gain.
The MFI industry in Bangladesh has been brought under the purview of a regulatory authority- Micro-Credit Regulatory Authority(MRA) unlike the ones in India where so far the RBI has been regulating only a few large MFIs, then also not extensively.
In the last few years as per the mix market data India has been growing at 50% and above in term of GLP(gross loan portfolio)compared to Bangladesh which even had a negative growth in some of these years. This data alone denotes the Indian MFI industry is in the growth stage compared to Bangladesh which is at a more stable growth phase.
Bangladesh micro-finance sector is regarded as not only the pioneer but also the largest and most efficient in the world. We should not forget that microfinance in Bangladesh is regarded very highly around the globe because of their huge contributions to the society, especially `at the bottom of the pyramid’. Many of us fail to appreciate this industry’s contribution in helping people to stay above poverty line despite three cyclones in three years, the huge growth in self confidence among women in villages and the up scaling of micro business to small businesses. People at times also fail to appreciate that the microfinance industry took financial services to the poor’s doorstep that the larger financial sector was not able to do. Microfinance industries have also tried to create social enterprises to accommodate the products produced by micro borrowers creating a demand. These successes have been honored by a Noble Peace Prize and a Knighthood.
We lead the global microfinance industry both in terms of its sheer size and productivity. According to the Microfinance Information Exchange (MiX) analysis report on Asia for 2009 Bangladesh caters to 22.8 Million borrowers compared to their Indian counterpart of 16 million and the whole of Asia of 57.6 million. Out of this huge borrower base in Bangladesh Grameen Bank (8 million) , BRAC ( 6.2 million) & ASA (5.6 million) encompass 87% of the entire Bangladeshi portfolio. Considering the size of the population of Bangladesh is 160 million and 36.3% below poverty line there are more grounds to cover. Bangladesh also has a gross loan portfolio of USD 2.5 billion compared to the entire South Asia of USD 4.7billion. Despite the large numbers, the cost per borrower for Bangladesh is much lower than other Asian countries.
Bangladeshi microfinance institutions have advanced from being development partner-supported entities towards almost self-sufficient institutions supported by some commercial financing. But still majority of the financing remains from donors. A majority of the loan portfolio of the MFIs is targeted towards agriculture. The present government is also very pro-poor and the central bank has directed all banks to provide credit directly to agri-business or through MFI-linkage(where there is no bank branches) at competitive rates. The directive was followed by a few large syndicated fund raising in the market for the MFIs.
However, the primary sources of financing for smaller MFIs still remain members’ deposits and Palli-Karma Sahayak Foundation (PKSF) funds. MFIs in Bangladesh cannot offer regular deposit/ savings service. Hence, they have to rely primarily on forced savings collected as a condition for membership or for access to loans. Some analysts argue whether donor support is a barrier for the microfinance sector to integrate into the mainstream financial sector.
A survey titled “Microfinance Banana Skins 2009,” sponsored by Citi Foundation, identified the risks to the business in light of the recent economic crisis. The survey was followed by a roundtable in Bangladesh, which concluded that the risks for Bangladesh MFIs are still comparatively lower than in India, Pakistan and some developed states. The three major risks identified were rising credit risks resulting from competition and lack of MIS, eroding image, and absence of succession plan.
Credit disbursements of MFIs used to be considered risk-free because of the high recovery rate compared to banks. But the loan recovery rate has been declining worldwide in the backdrop of the global financial crisis. It has to be taken into consideration that the crisis is likely to increase credit risk due to economic slowdown. Many microfinance clients live close to the edge and are perilously exposed to worsening economic conditions.
The economic crisis hit microfinance at a time when credit quality had already been deteriorating for reasons linked to the intensely competitive nature of the industry and a more calculating attitude to debt among borrowers. The concern is that the crisis will cause these unwelcome trends to accelerate.
Competition has led to an erosion of lending standards as lenders fight for market share and borrowers accept easy credit. This is evident from the shift from group lending to riskier individual lending. There is no clear data source to identify what the actual level of multiple borrowing for the industry or the Portfolio At Risk (Par) is. Nonetheless there is a general agreement that there is multiple borrowing but a point to ponder remains that despite the entire cry worldwide about multiple borrowing how much has it affected Bangladesh MFI’s? Most critics claim that there is huge multiple borrowing and poor people borrow from one MFI to pay-off another. But we are all aware that the borrower needs to pay a small amount every week to the MFI and there is not a one-off payment to the MFI’s. Thus the borrower is either investing in business or spending it for personal purposes. If they are doing the previous then it is good news because they will soon be migrating into a small enterprise. But if the borrower is doing the later then the NPA of the industry should have increased in leaps and bounds which the data available does not support so far.
Monitoring of credit quality is thus a problem due to lack of reporting. Except for the larger few, most MFIs do not follow international reporting standards. Calculation of delinquent loans by few MFIs remains obscure. Monitoring borrowers who do not have any identification number or track record is a mammoth task. The MFIs are currently trying to integrate the information contained in the national ID cards but system support is quite inadequate.
In the absence of any official database, MFIs have to maintain their own records of micro-borrowers and also social information due to their development orientation. Therefore, there exists a crying need for a strong and effective databank of micro-borrowers.
The second risk identified is the eroding image of the MFIs, who used to be perceived as philanthropic institutions, but their commercial operations have raised questions about their true agenda. In reality, compared to commercial banks, the operational and monitoring costs of MFIs, working in areas where commercial banks would never provide coverage, is far greater. Surprisingly, the rates charged by MFIs are still lower than the interest rates charged from unsecured credit card holders by commercial banks.
The third but most worrisome risk relates to the depth of management in the MFI sector. Whether they be large or small, MFIs are mostly operated like a family-run business with decision-making concentrated in the hands of a key person. Historically, people with good academic and professional backgrounds have refrained from joining the industry due to skepticism about the business model and social acceptance issues. Thus, the second-tier management and/or succession planning has remained hugely underdeveloped over the years.
Now that Bangladesh has established the Micro-credit Regulatory Act 2006 and a Micro-credit Regulatory Authority, we expect uniform reporting requirements and performance assessment procedure, proper policy guidelines, a central database of micro-borrowers, and active support for MFIs to become more vibrant for the greater interest of social and economic emancipation.
The micro-finance industry is now at a crossroads, and to take it to the next trajectory we have to increase our standards of reporting as well as processing, ensure wider coverage with timely recovery, integrate micro-finance into the mainstream financial system and, in the process, set global standards for others to follow. It is also time to take a more positive approach to the microfinance industry so that it remains a means to bring about financial Inclusion for the broader mass.
......................................................
Mamun Rashid is a banker and economic analyst. He can be reached at:mrashid1961@gmail.com