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Microfinance activities gaining ground
S M Rahman
10/14/2005
IN the past, the activities of the non-governmental organisations (NGOs) mostly concentrated on social development. They now encompass both social and commercial activities. There is no conflict between these two sets of activities with regard to poverty reduction. All these purport to meet the growing needs of the poor people for their betterment. To eradicate poverty, both these areas are essentially important to be addressed. Commercial activities are currently poised to overtake social development services. This is happening due to the need of the time and unmet demand of various services. Voluntary organisations have been engaged in social development work since long. However, their commercial activities upped rapidly in recent times to a gigantic proportion that sometimes tends to surpass private sector. This signals a transition to private sector as these organisations are turning into business NGOs.
Grameen Bank is widely believed to be a pioneer of microcredit in Bangladesh. The NGO modified the methodology later and took it up as an offshoot of social development programme. By now, it has emerged as a flagship programme of all NGOs. The number of meaningful microfinance NGOs presently will not perhaps exceed 250 (CDF Statistics, 2004). Of, these, some 200 NGOs constitute the core of the industry that are robustly supported by the Palli Karma Sahayak Foundation (PKSF). It is noticed that the zeal in undertaking social development is on the wane mainly due to paucity of funds. This is hampering poverty reduction activities.
A number of small NGOs are however using small resources in the social development work earned from the microfinance operations. No doubt this is a good sign, which others can try to emulate. Now that manifold interventions are taking place both in public and private sectors, poverty has been checked and is falling continuously at a slow pace, though. As per World Bank Development Report (2005), currently in Bangladesh, 36 per cent people are living below the poverty line (with income level US $1.0 per day). The country is pretty well known for floods, tidal surge and cyclones that occur almost in regular intervals causing colossal damage to livestock and properties. These menaces along with frequent crop failures have been militating against the gains and gumming up efforts in the poverty reduction. At any rate, microfinance has bolstered the resilience of the poor people in their fights against nature.
Sometime back, small NGOs often alleged that the bigger ones are stepping into their shoes. Such outcry is not heard nowadays. The reasons were that the clients of the small NGOs were switching over to bigger ones being lured with higher loan quantum. Product differentiation exists in the market but has yet to be more client-responsive and the prices of the products too should be further competitive in order to attract the clients.
The NGOs usually go by a graduation system in terms of aging of the membership to provide loans and do not jump overnight to enhance the credit ceiling. This makes many clients impatient who do not want to wait too long. The clients, therefore, begin to look for different institutions seeing that a particular institution fails to meet up their desired financial needs. A PKSF conducted in study in 2004 said that the extent of average overlapping at 33 per cent, which is a significant figure. In fact, the magnitude is higher in many places based on concentration of larger NGOs. This figure means that captive markets of NGOs are crumbling and turning into a non-segmented market.
The prevailing competition has also remained largely veiled. So far as micro financing is concerned, the NGOs need to think that the clients have a freedom of choice and a right too. Client selection and screening should be done very judiciously to retain them. Higher loan is generally risky and those who will provide stepped up loans may do so at their own peril. However, many practitioners say that as long as the clients are paying back, they are not bothered at all.
Microfinance NGOs, to some extent, are quasi-banks. They need to grow into a new generation microcredit banks devoted to the cause of poverty alleviation. Recently, the Grameen Bank has brought in landmark innovations in its programme design that may serve the poor better. Grameen Bank has moved far ahead linking with the domestic capital market through launching mutual fund. Other microfinance actors are yet to reap the benefits of this innovation.
The Grameen is a different type of bank that has made the poor clients as its owners. The NGOs who have amassed capital (through grants, low cost fund, loan interest and other income) could not transform them accordingly due to legal barrier. Empowerment of the poor can rightly be souped up by making the clients into owners of the resources. Clearly, Grameen types of institutions would be helpful in empowering the poor people. By linking the rural economy with the capital market, these banks can play an effective and pervasive role in financing micro-enterprises in a great way in addition to providing microfinance. It is heartening to note that the NGOs are still immune from any bad name for not getting involved in any venal practices while giving loans. This probity is an excellent strength for success in promoting micro enterprise. But they are to understand the distinction between micro enterprise and microfinance and, therefore, should design the microenterprise programmes in a different way including setting the interest rate.
Microfinance NGOs are not banks. Here one cannot deposit or withdraw any amount of money whenever he or she wishes. However, there is a felt need of such services. These organisations, indeed, do not need to become full-fledged banks for poverty reduction. We will have to refrain from comparing the microfinance (MF)-NGOs with banks particularly with regard to loan recovery, which we often do. It has to be borne in mind that commercial banks have a different infrastructure and a mercenary motive. It has its inherent limitation to reach the poor people in the outlying areas and difficult terrains. However, the banks can work rather indirectly by supporting the NGOs and similar other organisations.
Interestingly, steps have already been taken that need to be reinforced further. The NGO-led microfinance sector has been demonstrating splendid loan recovery rate of more than 90 per cent in most cases. Given the current experience, it is not hard for the banks to understand that investing money in the poor people's programmes may also fetch good profits. The banks can have an opportunity to diversify their current portfolio and/or offset accumulated loss by investing in the microfinance sector. The banks can, therefore, open separate windows for supporting microfinance and micro enterprise programmes. Increased cooperation among banks and NGOs may usher in a new era to infuse dynamism in the financial sector.
Also, lack of access of our local products to international markets will exacerbate the country's poverty. Any success or failure will thus affect the poor people. So side by side with government efforts, the politicians and social activists must raise their voices atop and carry out lobbying and advocacy at home and abroad brushing off political bickering.
With the growing of some macro economic sectors and the overseas migration of poor people, the poverty landscape is changing and having an added momentum. The non-resident Bangladeshis (NRBs) are contributing to the foreign currency reserve massively that is soothing the balance of payment. The rich are served at the expense of the poor. Of course, the potential for augmenting remittance flow is high. The network of larger NGOs can be effectively used as formal channels to transmit remittances to the remotest places of the country where there is no banking facility. Some bank(s) are already using this mode. Other banks that are dealing with remittances can use this infrastructure extensively for safe and quick dispatch of money to the poor rural households. This step will reduce the illegal hundi operations greatly and raise the foreign currency reserve of the country. If some NGOs (particularly large and mid-level working at the national level) become microcredit banks, the job can be better performed to the enormous benefit of the people as well as the government. The people will eventually repose more trust in such organisations.
The microfinance regulation process is learnt to be gaining ground. Following the act, the government may think of channelling funds to some selected NGOs to work on the high-priority areas of development in order to achieve better and quick results. Housing project of the government with NGOs, for instance, is a good example of cooperation whereby the poor people are getting long term loan with low interest. In addition, there are other areas where there is ongoing cooperation with the government. The government can also mull things over utilising some big and mid-level sustainable NGOs by farming out a part of the role of agriculture banks to them for efficient operations of agricultural credit to the marginal and small farmers. This initiative will certainly benefit more people and pave the way for rapid poverty reduction.
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The writer is a microfinance specialist
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