- Special financial products, digital banking and market linkages are reshaping microfinance for long-term economic sustainability
Soon after success stories of Micro financing pioneers like Grameen Bank of Bangladesh idea traveled to all parts of the world in late seventies and there occurred an upsurge in development of this new segment of financial sector in almost all the developing countries. Until close of the last century majority of the Micro Finance Institutions (MFIs) depended on funding from donors or their governments, hence failure or mortality rate of such MFIs everywhere has been very high due to their least concern for sustainability of their operations.
The nature of financial services to be catered for financially disadvantaged segments of population and restricted operational environments particularly in context of size of the loan and restricted avenues available for investment of surplus funds and above all vulnerability of the clients have been the main impeding factors for attaining sustainability of the operations, hence very few MFIs, particularly those whose capital base was being recouped through foreign donors or those who really cared for sustainability of their projects and went into lending and deposit taking business simultaneously and prudently, could survive effectively. Majority of such viable MFIs relied on group lending even that secured against overall group’s tangible assets like group savings with the MFI concerned.
With the beginning of present century, a number of developing countries ventured into regulating and supervising operations of MFIs through regulatory policy frame work of their central banks and providing opportunity to NGO based MFIs to get converted into a Micro finance bank. In recent past there emerged cases where micro finance banks were merged with big conventional banks.
Reshaping Pakistan’s microfinance sector
In Pakistan, in recent past there occurred merger of First micro finance bank into Habib Bank Ltd. Similarly quite a number of MFBs have been taken over by telecommunication companies and through use of digitisation operations of such entities have become quite sustainable.
Besides that in Pakistan, State Bank of Pakistan in order to promote meaningful and sustainable micro financing issued Micro Finance Ordinance 2001 for regulating and supervising the operations of MFIs and Micro Finance Banks (MFBs). For setting up a Micro finance bank minimum paid up capital requirements have been laid down on the basis of size of the operations and guidelines have been provided for formulating Board of directors and appointment of chief executive, so as to ensure competent and accountable top management and policy makers at the helm of affairs.
The prudential regulations giving the eligibility criteria of a borrower, fixing maximum size of the loan and strict and mandatory provisioning requirements for defaulting loans right from early stage of default and compulsory writing of a loan if it remains in default for a year has created an environment conducive for attaining sustainability. However, this objective is attainable provided MBIs uphold principles of good governance measured through financial sustainability, outreach of the organisation and its impact in terms of economic empowerment achieved by its clients.
Micro Finance banks and MFIs are in business for providing basic financial services, through various loans and saving instruments to financially disadvantaged segment of the population. This enables them to set up or expand their micro businesses, generate income and build up risk efficient assets portfolio of both movable and immovable properties and smoothening their consumption pattern through building up their savings in profitable saving schemes to provide cushion in situations of crop failure and other natural calamities etc.
Special products
In a situation of natural shocks coming to the business of the clients, sometimes it becomes incumbent upon MFIs and MBIs to provide additional financial assistance to their clients to reestablish business or for rehabilitation work in case of natural calamities like earth quakes and floods etc. In Pakistan where occurrence of natural calamities is a common phenomenon people from low income class are always in need of rehabilitation funds for rebuilding their damaged houses, farms and refurbish lost livestock due to high frequency of floods and earthquakes etc in several parts of the country.
Micro finance banks both in public and private sector operating in those areas must come forward to float special loan products carrying soft terms, keeping in view their repayment capacity so that they are able to revive their businesses and rehabilitate themselves without defaulting loan repayment at any stage.
Further, MFIs and MFBs must endeavor to offer loan and saving products and other ancillary services according to changing needs of the clients. This necessitates creation of research department for development of innovative products on continuous basis, which are not only beneficial for all segments of clients but also involve low transaction cost.
According to changing environment particularly climate change, loans specifically for setting up or growth of eco-friendly businesses such as renewable energy installations, organic farms and forestry etc will ensure sustainability of the institution.
Apart from floating loan products according to peculiar needs of cross sections of financially disadvantaged population, they need to add innovation and value to the set of their various credit schemes by providing support services like market linkage in order to enhance viability of client’s business, which in turn ensures timely and safe return of MFI’s funds, thus reducing transaction cost. Clients particularly those from rural areas market their products through middle men, hence do not get fair price. MFIs / MBIs having branches in big cities can develop market linkage for their rural area clients for products like milk and fruits etc with manufacturing concerns of dairy products, fruit juices, jams and jellies and other preserved food items to ensure not only better price for products through elimination of middle man, but also regular supply of raw material to the manufacturing concern. This also ensures regular recovery of loan from the borrowers.
Digitisation and financial inclusion
Recent news in media regarding rising volume of stuck up advances of micro finance sector entails strict monitoring of borrowers’ businesses particularly with regard to cash flows and marketing techniques used by borrowers. Digitisation, which is making inroads in all types of banking institutions, if speeded up by MFBs can eliminate all hiccups in growth and sustainability of micro financing.
Normally owners of micro businesses are in a disadvantaged position regarding bargaining with middle man or ultimate buyer due to their lack of knowledge of the market trends, poor packing of their products and their inability to hold products particularly of food items till they get desired price, MFIs / MBIs must arrange to provide online banking orientation to clients in the areas of packing, basic marketing techniques, cold storage facilities, behavioral skills, particularly assertiveness to develop their bargaining skills. This will not only enable clients to get better price for their products, but also new avenues of business like packaging and cold storage business would be available to go into with the help of extended loan (within maximum limit of loan size allowed) from MFB concerned. This in turn will augment core business of the MFI /MFB concern, which is a key to their sustainability.
Following the profile of activities of foreign funded ‘Grameen Bank of Bangladesh’ MFIs and MBIs in developing countries are often motivated to provide non financial services like education to their clients and at the same time their legitimate concern for sustainability prevents them from entering this area of activity. In this regard group approach to lending can help MFIs /MFB to provide low cost business and vocational education to their clients just to improve the performance of their business, which will ultimately add to sustainability of MFI itself.
No doubt transaction cost with MFIs/MBIs is exceptionally high due to their providing services at door step of their clients in far flung areas. In this regard efforts should be made to develop such a delivery and collection of loans mechanism that transaction cost as well as risk involved is minimized. In this context setting up fully computerised satellite units, forming linkage between far-flung / rural areas clients and branches in urban areas by some of the MFBs was found a feasible strategy, saving large capital and recurring cost involved in having a full fledged branch in an area where operations are not expected to be viable for quite a long time. Under this set up loan applications would be collected by satellite unit and particulars of would be borrower communicated to designated branch on line and on receipt of approval from branch / Regional office satellite unit will arrange disbursement of loan through a bank having wide net work of branches or through area post office with whom agency arrangements are established for the purpose.
New era for MFIs
At initial stage when core business of a micro finance institution has not developed much then unutilized funds need to be invested prudently in government securities and other avenues coming within the purview of permissible treasury transactions including investment in Islamic product like Sukkoks to make the operations sustainable right from the very beginning. However earnings from the sources not forming part of core business of MFI/MBI should not be considered as a parameter to assess their viability / sustainability. Apart from financial viability, social welfare of the clients and improvement in quality of their lives should also be the parameters to determine level of operational efficiency of a micro finance entity. In this regard, apart from amount disbursed outreach level should be the criteria for determining performance rating of an MFI. The digitisation of banking transaction now being followed by both conventional and micro finance banks will greatly help enhancing outreach level.
Generally ratings have been focused on financial and management performance of MFI/MFB. No doubt sustainability is a vital issue for any financial organisation, but for a micro finance institution sustainability is not an end itself. It is a means to an end. MFIs/MBIs have a social mission. Credit rating of an MFI is needed to be linked with its social rating. Social rating is a graded assessment of an MFI/MBI’s ability to reach and serve target market. It is a tool to determine whether an MFI is achieving or likely to achieve (if MFIs MFBs are assessed at start up period) its social mission and whether its social objectives are in line with wider development values. Social rating when combined with credit rating compares social and financial performance and facilitates or gives justification for additional funds allocation to an MFI at start up period and also for those who have not yet reached financial sustainability stage but are strong on social parameters.
Further, it is common with MFIs that in view of their limited avenues of transactions, little attention is paid towards quality of the staff. In view of their dealing with a vulnerable segment of population, they need to induct high caliber professionals and IT experts particularly in the area of research and marketing not only to widen the spectrum of viable loan and saving products, but also to facilitate creating viable business environment for their clients.
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