Rapid Growth of Microfinance : New Opportunities and Challenges

By Dr. Souren Ghosal

It is really interesting and heartening to observe the rapid growth of micro financing institutions in developing countries irrespective of the facts that it has neither impacted much on poverty alleviation nor on economic growth of the country. At best the beneficial effect that could be acknowledged so far is that it has helped poor to finance their trade and maintain their family.  However from the development perspective these institutions are expected to give poor people a chance to come out of poverty and become productive agents to improve their own lives.

This objective could not be attained due to various reasons but some of them are so obvious that it is difficult to comprehend how these have escaped the notice of policy makers and even promoters as most of them while framing policies and strategizing business announced from the top of their roof  that these institutions are conceived and funded to ameliorate poverty of disadvantaged people. The obvious question is therefore what went wrong and despite rapid growth of these institutions in developing countries including India; they failed to deliver the much publicized and well defined objective set before these institutions by policy makers and promoters.

However any one with some insight and experience could perceive some of the obvious reasons for this failure to fulfill the desired objective. These could be summed up as follows:

a. Availability of less risky and more rewarding space to fund hawkers and traders branded as poor in urban and semi-urban and even in villages;

b. Opportunity to become intermediaries of commercial banks who avoid such lending but are under compulsion of governments and regulators to lend some fixed percentage of their lending to farmers, traders and artisans of villages and semi-urban towns;

c. Facilities to securitize these loans with some discounts to banks especially foreign banks who are also burdened with statutory as well as corporate social responsibility to lend and uplift the poor;

d. Providing short term loans based on cash trading transactions suited  well with the promoters and funding institutions as these transactions generally get paid and hence no default or least number of default arises;

Such short term transactions help creation of group lending and group guarantee both informally and formally without much persuasion.

It is therefore not very unusual to find that most of the MFIs have adopted easiest and safest model. But many pioneers have also proved that it is not necessary to pursue the safest course as “micro finance has been demonstrated to be a profitable business serving the poor, even in some difficult environments.”(Vide Gil Crawford of Micro Vest. Grameen Bank of Bangladesh and Sewa of India are some of the illustrious examples  that brings out how large number of poor could be empowered and trained to not only earn their livelihood but also to improve their standard of living and move to higher strata of society. However these institutions have largely concentrated on women members of the family and helped them to develop new crafts that would provide them subsidiary family income and that way enrich their families. It is true this is one very powerful way to release the family from the clutches of poverty; but certainly not helping total eradication of poverty. This could be possible only when SMIs start financing SMEs and farmers on a big scale. This would be feasible only when we reinvent and revisit the MFIs and develop a private public partnership model. This is more so as farming where highest number of poor people are engaged have not yet become viable due to dependence on monsoon and inability to create adequate irrigation facilities on their own and also modernizing farming due to lack of knowledge of shift in technology in cropping pattern and irrigation as well as soil maintenance and development. In fact there are hardly any efforts to communicate these rapid changes despite existence of extension officer at block level and agricultural specialist at district level. Most of them are not abreast with recent development in agronomy and irrigation technology.

There are visible signs that MFIs need total transformation both in strategy and business models and perhaps in constitution also to wriggle out from the present complacency and apathy towards real poor. It is unfortunate to observe that almost all MFIs are assessed on the basis of their coverage, profitability and high level of repayment index instead of measuring whether they are successful in achieving their primary goals– poverty alleviations and inclusive growth. It is true some enlightened MFIs have started providing medical supports and health checking and education facilities and some of them also have gone a little further to provide insurance facilities also These are strategies that would not ameliorate poverty. It is therefore imperative to look for some business strategy for MFIs that would provide poor not only succor and sustainability but also help them to attain higher standard of living. In this regard one has to first identify the customer group namely traders ,artisans and or farmers that they can serve best and thereafter the services and products that they are best equipped to provide and also develop adequate demand for these in the market. It is true that already some experiments are going on like developing partnership models with self help groups and banks but these are mostly aiming and aiding banks to fulfill their mandatory obligations to lend to farmers and artisans.  .

But in all these experimentation one missing link that is not taken care of is the rapid development of technology and demand pattern of people either due to technology and or social and economic changes rapidly overthrowing the existing norms and patterns of living and business and entertainment demand patterns even in rural areas. Globalization has narrowed the spatial differentiation and widened the wealth differentiation. To day there is serious attempt to build infrastructures in villages to narrow down the present differences that one experiences there when compared with what are available in cities and towns.

The present emerging trend in social and economic sphere is also experiencing some radical change as poor people are gradually aspiring to become middle class, and middle class people are aspiring to join rich people. This dynamic transformation is not confined to one country only but spreading both in developing as well as developed countries but obviously less visible in the latter countries as most of their people have been enjoying better environment and infrastructure.

A closer look would reveal that there is emerging felt need to have financial institutions that would help poor to achieve their ambition to join the middle class and would assist the rich people to become more affluent by getting access to more wealth through innovative investments of their own funds and having access to market fund with ease and flexible terms and conditions through some innovative instruments like special purpose vehicle (SPV) and qualified institutional placement ( QIP )etc. But this distinct change is not visible in the business strategy in most of the MFIs and banks all over the world with a few exceptions. It is true such transformation could only be gradual but what is most disturbing is that no awareness and any conscious efforts in these directions could be seen in policy strategy of governments and regulatory authorities

It is obvious therefore that there is need to revisit strategies now pursued by MFIs and look for such innovation that would not only be sustainable but also fulfill its role as intermediary to generate savings and investments with social performance mission. It has been rightly observed by VAN HORNA (2003) that intermediary role i.e., bridging the gap should not be distorted by any one including monetary authorities. It would therefore serve poor better if these institutions concentrate more to develop entrepreneurs in rural, semi-urban, urban and even in metropolitan tow

Financial inclusion is perhaps one way MFIs and banks can become socially responsible. For this MFIs and banks have to redefine their role as an intermediary to fund the Bottom of Pyramid. The role model that could be visualized could be summed up as follows:

1. to fund existing and emerging needs of rural and unbanked areas;

2. to search and develop information tools to communicate and spread the message of services and products available to all including disadvantaged people ;

3. to develop saving habits as gateway to financial inclusion;

4. to help developing projects for artisans on cluster basis and for farmers for identified compact lands;

5. to help developing educational institutions that could be commercially viable after due gestation period;

6. to help developing drinking and irrigation water facilities by creating societies of farmers and artisans to run these on commercial basis after some predetermined gestation period;

7. to assist in developing solar energy facilities as a commercially viable project;

To assist in developing health centers and that too as a commercially viable project.

O.P. BHATT, chairman of SBI has rightly said that ‘banks do not exist in vacuum. They make a large contribution to country’s GDP growth; meet the demand of growing middle class. Contribute to infrastructure, spending and reach out to semi-urban and rural areas.’  In that case there is no-hold bar for banks in partnership with MFIs to strategize on above lines. In this regard KARMAKAR M.D. NABARD has rightly pointed out that ‘the need for policy changes for priority sector, a need to redefine the role of rural moneylenders, a need to find out the emerging rural service sector, a need for an information campaign…’ has become overdue.

In this regard it may be worthwhile to note some of the initiatives taken by the ICICI bank. It has enhanced its capacity to fulfill its social responsibility immensely through the establishment of ICICI FOUNDATION for giving boost to inclusive growth. It would obviously catalyze and accelerate activities to bridge the economic and social gaps that have clouded our latent potentiality of growth. It would enable large number of poor children to get access to good education as it would fund and develop schools in rural areas. It has also aimed to improve the earnings of poor people through training and marketing support. It also aims at developing sustainable environment friendly activities for the disadvantaged people of the society. It has also strategized facilitating universal access to finance and market to provide the needs of poor. It has also given due stress to health facility to the poor as human capital is key to economic growth. It has also created research facilities to deliver high quality sustainable environment friendly infrastructure and for this it has partnered with ENVIRONMENTALLY SUSTAINABLE PROJECT FINANCE.

Similarly S.B.I., AXIS BANK, HSBC, BARCLAYS and DEUTCHE BANK all have initiated in some form or the other to fulfill their social responsibility but the need is total but gradual transformation of MFIs business strategy as has been highlighted over here. In fact, MFIs still have miles to go to fulfill the much desired objective of social responsibility. But happy sign is that it is gradually dawning in their minds of most of the enlightened management of MFIs.

It is obvious therefore that institutions undertaking micro-financing should view their social responsibility more importantly and take into account all social and environmental factors along with economic parameters to evolve a sustainable strategy to serve the poor. It is high time for these institutions not to be a copy cat of GRAMEEN BANK of BANGLADESH  despite its highly advertised success stories as an in depth analysis would reveal that it has also failed to eliminate poverty of people of BANGLADESH. It is true it has largely empowered poor women to contribute in their family income but it has not been able to uplift poor to be classified as middle-class. It would be necessary for MFIs to revisit their business strategy as detailed below:

1. create policy environment that would help generate economic activities for the poor;

2. encourage saving habits among the poor;

3. integrate existing schemes and policies of government and social institutions including philanthropic societies schemes in their lending policies to the poor so that there would be one window for getting all supports for the upgrading of poor;

4. create public private partnership model to enhance risk taking capacity and managerial skill;

5. create prudential regulatory authority to oversight the performance of MFIs;

Make it easier for MFIs to source funds from various funding agencies of government and private.

It is true that such transformation would need paradigm change in the mindset of policy makers both in the government and management of MFIs but it is inevitable if poverty eradication is really the primary objective of MFIs. No doubt this is feasible proposition and one can certainly achieve it if endowed with passion and vision to translate it into a reality.

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