Devendra Pratap Shah

The access to microfinance provided by sustainable microfinance institutions (MFIs) is a powerful tool for poverty reduction as it improves poor people’s ability to increase incomes, build assets, and reduce vulnerability during their economic hardship. Microfinance movement led by Grameen Bank, Bangladesh is now being replicated in many developing countries and has become one of the interesting areas for the governments, planners, policymakers, professionals, donors and academicians. Western universities are considering microfinance as a new area of study.

Despite this, more than one billion poor people lack access to institutional finance. As the gap between the potential demand for, and the actual supply of, microfinance services remains large, bridging this is a challenge for developing countries. If they continue to follow the current approach, it will take long to cover poor households still left out by the existing financial system. The possible solution for expansion of microfinance, therefore, is obviously its commercialisation, which alone can guarantee the multiplication of financially healthy MFIs. The goal here is a financial system that serves the whole population. For this to happen, microfinance needs to integrate with the country’s financial sector.

In the past, in many countries micro credit was disbursed, and even now in some countries, this is being done on a subsidised basis. Consequently, the operation has been characterised by high operating costs,low repayment rates and slow growth of outreach. Because of this, resourceful commercial banks and other similar institutions were shying away from the microfinance operation resulting in not only low outreach but also low growth. But the scenario has now changed allowing MFIs autonomy and opportunity for expanding the poor’s access to demand-driven microfinance products. In the absence of a commercial approach, the prospects are not good for reaching a significant number of potential clients with quality and diverse services on a permanent basis. Under the new approach, MFIs are allowed to make profit, run by the funds obtained through market, and able to expand its operation by the support of retained earnings.

Professionals and donors believe that poor people can pay any rate because in any case it will be lower than moneylenders’ rate. However, MFIs’ efficiency should cut controllable cost to maintain lending rate not too high. In Nepal there are MFIs like Nirdhan that charge highest rates, even 25%, Grameen about 20%, ADBN 16%, and commercial banks 12%. Recently, however, all these institutions have cut their lending rates by a few percentage points in the wake of their own capital cost which is sharply going down. Some NGOs charge lowest rates as either they are subsidised by donors or are receiving funds from institutional sources at cheaper rates.

We, therefore, can never say that MFIs charging lower rates are more efficient than others charging higher rates and vice versa.

Nepal’s microfinance movement, started some 30 years before, is not yet adequately advanced. There are MFIs in public or private sectors, run by government or directly by donors, in the form of NGO or company or cooperatives. In spite of large number of MFIs, the poor majority are deprived of formal financial services. This is due to the lack of commercial principles with appropriate policy and legal environment that is hindering the commercialisation of microfinance.

In Nepal’s microfinance sector, NRB (the regulatory authority of financial sector) and Asian Development Bank (ADB), Nepal’s major donor, adopted double standards and are largely responsible for its distortion. On the one hand, they opposed subsidy in microfinance, and on the other, they themselves are directly involved in introducing subsidy. The promotion of Rural Microfinance Centre is one example. The lack of proper regulatory and supervisory standards as said earlier is the next, which is NRB’s responsibility. These are the hurdles for healthy growth of microfinance market.

The government is inclined to pour money in the name of poor, but lacks vision and the method of doing it. The example is the recent creation of Poverty Alleviation Fund (PAF), as an umbrella organisation for targeted anti poverty programmes including microfinance. In all probability, PAF is likely to be one more central level MFI with additional benefit of providing subsidy for social or community programmes. Undoubtedly, there is no reason to oppose its creation, but such an organisation was expected to support the financial system approach to microfinance within appropriate regulatory environment. At this stage professionals fear that PAF could be exploited by politicians for their personal benefit. The conclusion, therefore, is that if the poor’s access to microfinance has to increase, the government, NRB and PAF should come together for its commercialisation. The alternative is obviously slow or no growth of the sector.

Shah is former chairman, ADBN