STRENGTHENING THE MICROFINANCING MECHANISM

By Muhammad Zamir, United News of Bangladesh, March 2005

The recent Conference on microfinance in Dhaka indicated, that for all
practical purposes, this process is now part of the main-stream
development idea.

It was also evident from the discussions that microcredit is having a
major impact on reducing poverty at both the local and the national
levels. It was also clear that microenterprise programmes are becoming
more effective because they are helping the poor to help themselves.

This bottom-up approach as opposed to the top-down method is obviously
drawing attention for its many successes. In terms of strategy it is also
being favoured by foreign aid bureaucracies.

What is more important however is the great contribution that this process
has made towards women empowerment. This micro-strategy is making
significant changes in the gender ballgame. It is also becoming clear that
women are equal if not better business entrepreneurs at the micro-level.

Various institutions disclosed how women-run businesses often are
associated with the best credit risks and are more likely to funnel
earnings into their children's education. This was indeed revealing. It
was also pointed out that formal business training need not, contrary to
belief, be a prerequisite to successful business development.

Such factors assume that much more importance given the fact that we are
only ten years away from 2015 -- the target year, by when as part of the
Millennium Development Goal, we are supposed to achieve the formidable
task of reducing the number of people (presently 1.3 billion) living in
abject poverty by half.

Most of us agree that poverty `is arguably both a cause and an effect of
many international problems, including global hunger, environmental
degradation, overpopulation, illiteracy, civil strife, economic stagnation
and armed conflict'. These issues in addition to being detrimental by
themselves , can also be the cause of the other threat- terror and
terrorism. The international community understands today that if these
factors are not addressed effectively and soon, there will be spill-over
effects in every sphere of our lives wherever we may be. It is a global
development challenge in which we are all stake holders.

The microfinance industry which was pioneered in Bangladesh in 1976 as a
response to the terrible famine in Bangladesh in 1974 has come a long way.
During the pilot phase (1976-1983), outreach grew from fewer than 100
clients to more than 45,000. Once the Grameen Bank was launched, a period
of sustained growth resulted in outreach of 850,000 by 1990. By 2000, it
had reached 2.4 million and by December 2003, it had reached 3.0 million.
Today, some 200 other providers in Bangladesh, many of them successful
Grameen investors, reach another nine million families. These statistics
are staggering given the fact that the overwhelming majority of those
participating are women.

Another interesting aspect also deserves special mention. Highly credible
research has also indicated that within the Grameen experience itself,
some 120,000 families are crossing the poverty line each year. They are
being able to do so, on an average, after being associated for five or six
years with the process. All this, while the repayment rate has hovered
between 95 and 99 per cent.

The same experience has also been reflected in the findings of another
important Bangladesh micro-credit provider - ASA. They have reported that
they are presently associated with 2.34 million extremely poor families
whose daily average income is around US$ One. ASA has however claimed to
be slightly different from the other major providers. They have stated
that all ASA loans are made to individuals, without collateral or group
liability component. They also calculate the service charge flat on the
principal of the loan. ASA also appears to have gone slightly further than
others in another aspect. Their model has been standardized. ASA has
outlined all its procedures in a simple written manual. This Manual
clearly outlines all factors, from loan application steps, record-keeping
procedures and staff responsibilities to allowable office expenses. Such a
process should encourage transparency.

Shared experience certifies that women appear to be better credit risks.
It is also suggested that they are more likely to use their profit to
break out of the generational cycle of poverty. It is this cause and
effect factor that leads me to believe that microfinance should be
provided in a decentralized manner where mid-level management need to be
based in the field. This would allow them to work closely with their
subordinates and facilitate fast and effective decision making.

Such an approach is likely to enable achieving not only the overriding
objective of poverty reduction but also social empowerment.
In the contemporary world, poverty reduction appears to have been
franchised. This has led to impressive growth of the microfinance movement
globally. Some 67.6 million families are befitting today world-wide. Of
these families, an impressive 37.7 million were among the `hard-core poor'
when they started participating. Poverty is being challenged in a
systematic manner under this initiative.

We have over the years learnt some valuable lessons. We now know that the
desperate poor can borrow on terms on which the micro financing
institutions can lend profitably. Such behaviour exists despite the fact
that some of these institutions are alleged to be maintaining very high
levels of interest.

I believe that microfinance is best understood if it is considered to be a
sort of a platform, `rather than simply as another intervention'. In its
own way, it is helping to create an infrastructure where the poor,
previously seen as isolated and without accountable capital, can be
organised in large numbers and provided credit to participate effectively
in economic and social initiatives.

This process has helped poor women in particular to invest in
opportunities for income and growth. It has also assisted them to manage
risks and reduce their vulnerability by protecting them against
emergencies . It has also helped them to plan for events such as marriage,
education for children and funerals. This in turn has provided
participating women with increased self-esteem and also gained them
increased respect from extended family and in-laws.

Another important aspect of the `multiplier effect' has been the greater
attention that is given by participating women to better nutrition,
reproductive health and education of girl children. These have been borne
out in numerous studies carried out not only in Bangladesh but also in
diverse countries like Ghana, Bolivia, Colombia, Uganda, Gambia and
Nigeria.

Many steps have already been taken. It has brought the movement forward.
There are still areas however, which need to be considered seriously and
addressed accordingly by the policy makers in the microfinance sector.

Some of these are:

- automatising the microfinancing process through improved use of
communications technology. This is vital in the context of future growth
in this sector. This will also reduce the scope for error and fraud among
loan officers;

- making available technology for the creation of more profitable
businesses for those participating in the microcredit process;

- encouraging private capital markets to increasingly invest in
microfinance on a commercial basis. Such incremental funding will enhance
prospects of sustainability;

- improving the regulatory environment. While microfinancing institutions
need not be regulated by the same regulations applicable for commercial
banks and other financial institutions, they should nevertheless be
accountable in terms of stringent audit;

- increasing the percentage of female loan officers. This will improve the
enabling environment;

- determining interest rate in this informal financing sector on the basis
of market and quality of service extended. In this context, it would be
interesting to see the reaction on the ground to the recent proposal of

Finance Minister M. Saifur Rahman that the rates on loans given by
micro-credit NGOs through Palli Karma Sahayak Foundation needs to be
reduced to 12 per cent from the present 15 per cent. Implementation of
this directive would indicate whether competition, as in any other area
can be the catch-word;

- avoiding the one-size-fits-all methodology. This will enhance prospects
for small women entrepreneurs and help them to graduate to more
sophisticated financial products and

- creating insurance services as a form of support for those availing of
loans.

There are still many barriers to the participation of the extreme poor and
their empowerment within the development agenda. Nevertheless, the most
important step has already been taken. We have accomplished a beginning of
which we can all be proud. We now have to take that important central step
of making microfinancing a pivotal part of our government agenda. This has
turned out to be an excellent idea but the best, in my opinion, is yet to
come. The government needs to take a more proactive role as a facilitator
and forge a stronger partnership with the relevant NGOs in their common
fight against poverty.

- The author is a former Secretary and Ambassador.