Microfinance in Asia:
greed or goodwill?

Bangladeshi basket weavers: Microfinance has liberated the creative energies of marginalised women and others who are beyond the pale of normal credit. - Photo: Grameen Bank

MUHAMMED Yunus, Bangladeshi banker and economist – widely regarded as the modern day father of microfinance – frowns at the mention of initial public offerings. The idea he propagated, lending to a group of disenfranchised low-income entrepreneurs instead of credit-flush individuals, was intended as an instrument of social empowerment to liberate dormant energies and revitalise the micro economy.

Loans in microfinance are based more often on trust, than visible collateral. If made to individuals in a group, preferably women (proven to have a more responsible attitude towards money), repayment is considered a shared responsibility. Since these loans are offered to borrowers in the lowest strata of society, they serve a profound social purpose.

In hands of the private sector, micro-lending – a large part of which is unsecured – is treated on par with credit card loans. From lending to goat herders, borrowers now include the likes of traders and local artisans. The altruistically inclined ask for caps on interest rate charges in the name of social benefit.

Raising funds through an IPO puts the spotlight on profitability. This is, arguably, not a bad thought. To reach out to poor households – and there are plenty – a firm needs scale. Commercial markets are the only place where large sums can be raised. In doing that a microfinance company has to deliver a reasonable return to investors as well as generate enough profit to give confidence to lenders, so that they continue to lend. And as companies gain economies of scale, it could be reasonable to expect a continued reduction in interest rates. An obligation turns into an exciting opportunity.

Ryan Rodrigues

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Microfinance – whose origins can be traced back to 1720, with the launch of the Irish Loan Fund – is back in focus largely due to Yunus who assiduously developed the idea. It is being tested in different geographical markets under varied levels of regulation

In theory this should tick like clockwork. Instead, somewhere along the way, greed takes over. Promoters in India, hard selling equity, declare returns on assets of between five to six percent. Borrower interest rate charges range between 24-60 percent. When the Bill and Melinda Gates Foundation announces grants to non-profit microfinance organisations, it attracts protests from for-profit players. Such grants, they argue, distort competition and re-shape borrower expectations.

Now in the Indian states of Andhra Pradesh and Karnataka – the former a pilot state for such business – microfinance is turning into a bad word. From the story of Anjamma (microsite.accenture.com) – who took a loan of US$33 to buy a goat and 12 loan cycles later owned a buffalo and a plot of land – making news are the deep-in-debt, suicidal stories of Ranjitha, Kausar, Aliya and Rama (www.business-standard.com).

SKS Microfinance (www.sksindia.com) – an Indian nonprofit that converted into a for-profit enterprise in 2005 – listed on the Bombay Stock Exchange in August 2010 at a price of US$22. Available at US$15.3, SKS is less than half the price of its all-time high (US$31). Basix, Spandana, Share MicroFin, Equitas – all Indian for-profit microfinance companies with sizeable businesses – have either delayed or scrapped plans for a public offering of shares. Grameen Foundation (www.gfusa.org), USA’s program on capital markets, returns a “Sorry – page not found”. Yunus has a single question to all this: “How different can such companies be from the moneylenders?”

Microfinance – whose origins can be traced back to 1720, with the launch of the Irish Loan Fund – is back in focus largely due to Yunus who assiduously developed the idea. It is being tested in different geographical markets under varied levels of regulation. Nepal is in the process of drafting a first microfinance law. In Cambodia, where limited liability companies provide microfinance, players have been given deposit-taking licenses. Bangladesh – where microfinance continues to grow despite high market penetration – has capped interest rate charges at 27 percent. Bangladesh also has Grameen Bank, the country’s largest microfinance institution, regulated by a separate law enacted in 1983.

In China microfinance still has a long way to go, with not more than one microcredit company active in any given county. In Thailand and Vietnam, microfinance is still a government-sponsored activity. In Indonesia, commercial banks account for around 90 per cent of microfinance loans.

Comparatively in India, a draft Microfinance Bill was introduced in 2007, which subsequently lapsed. Private sector companies in India play an active role in microfinance – despite a serious threat that regulation will strangulate all gains. The government is likely to introduce the Bill equating microfinance companies with Indian moneylenders.

An atmosphere most conducive to the development of microfinance, an Economist Intelligence Unit (indiamicrofinance.com) survey finds, exists in Peru, Bolivia and the Philippines. The survey places Pakistan at fifth place, a better position than eighth-ranked India.

The Philippines and Pakistan rank high for having permitted microfinance banks as the most important service providers. In Pakistan, the First Microfinance Bank is a private, non-listed entity, owned by the Aga Khan Foundation and the IFC (International Finance Corporation). Its interest rate charges range between 10-15 percent. While India has yet to warm up to the idea of a specialised microfinance bank, nearly 80 percent of microfinance business takes place through not-for-profit, non-banking financial companies and microfinance institutions.

Microfinance sceptics are suddenly legion. A former Reserve Bank of India governor has asked for microfinance companies to be treated at par with moneylenders. Opposition political parties have asked borrowers in Andhra Pradesh to repay loans without interest. If Indian public sector banks have the ability to provide microloans at much lower rates, they argue that such companies should not have been lending in the first place. A recently issued ordinance (indiamicrofinance.com) has asked for all microfinance companies to register with the state government. SKS has had to change billing cycles from a weekly to a monthly basis.

Borrowers – who acquired loans, sometimes three to four, from different microfinance companies – are equally to blame. Some acquired fresh loans to repay existing ones. The Microfinance Institutions Network (MFIN) – an industry-led self-regulatory body, which is also meant to serve as a credit bureau and keep tabs on borrower creditworthiness – was set up only a year back. Whether it can devise products at a cost that is able to service microfinance companies, is a different matter for discussion.

Comparatively, the world over, the market for microfinance is rapidly evolving for new products. In Kenya, telecom player Safaricom and its partner Vodafone allow microfinance company SMEP’s customers to make payments through a mobile service called M-Pesa. While Safaricom charges a notional fee for this service, it brings down the operational cost of collection for the microfinance company. It also makes payment an easier task for the borrower.

The US-based Kiva (www.kiva.org) – an online, non-profit, people-to-people website – has provided loans valued at US$173 million, raised through 500,000 users. Kiva partners with companies across countries that lend to microfinance consumers. These companies send a picture and profile of the borrower to Kiva, which is published on Kiva’s website. Potential lenders then browse through Kiva’s pages and may support a chosen entrepreneur – merely underwriting a pre-approved loan.

Such money will not reach that entrepreneur, and may indeed be used to fund another. What it does provide is much needed liquidity to run microfinance companies. With 81 percent of loans to women, Kiva has a repayment rate of 98.99 percent. Kiva’s success has already spawned new sites like UYDO (www.uydo.org), Oikocredit (www.oikocredit.org) and Rangde (www.rangde.org).

There is little doubt that microfinance, and the companies that lend such products, are here to stay. What matters is the manner in which these companies operate, lending to a sensitive sector, and the level of regulation required to keep them running smoothly. Whether microfinance companies, which cannot attain high credit ratings due to the inherent nature of unsecured lending, can be allowed to borrow through public deposits. Or go even further and set up microfinance banks.

It is elementary that if a financier can borrow cheap, he can lend cheap. Since microfinance companies borrow primarily from the banking system, they can never offer loans as competitively priced as those offered by banks. What they do offer is a network more entrenched for payment collection than that of a bank’s branching network. Instead of travelling miles every week to repay a microloan at a branch, borrowers are allowed to make payments at their doorstep.

Banks in India’s public sector have had their opportunity to swamp this market with microloan products in the past. Nearly 2,000 urban and rural cooperative banks in India (apart from 95,000 agricultural credit societies), some of which have been around for over a century, were modelled for exactly such a purpose. State government agencies still offer loans at interest rates as low as three to five percent. But mired by state-level political constraints, and dual regulatory control, they fare poorly. Nearly half of India remains untouched by the banking network.

More recently, in a big push, millions of new no-frills banking accounts have been opened in rural India, yet many of these have no life in them. There is a high, recurring cost to maintain these accounts – intermediation- and technology-associated – and any form of success requires further cross-selling of new micro-insurance and micro-mutual fund products to consumers.

Subsidised schemes, led by governments, may seem necessary for the poor and the weak. But they are prone to failure, with unsustainably low interest rates and weak loan repayment terms. Microfinance has thrived where the government has failed. A strong regulatory system is necessary to ensure fairness, accountability and transparency. But regulation should not drive away the honest players from the field.

Ryan Maxim Rodrigues is senior correspondent, banking and finance, at Business India. He oversees Business India’s Best Bank annual panel meeting and awards, and has written for IndiaNow, Knowledge@Wharton.com and a range of other magazines.

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Cardenas28Cornelia (30 August, 2011)

All people deserve wealthy life and personal loans or credit loan can make it much better. Because freedom depends on money state. – This comment has been edited