Microfinance: An Introduction

Abstract

What makes microfinance economically attractive as a business to NGOs, banks and other institutions? How effective are the microfinance delivery models and schemes? Given the enormous sums of money that are bandied about, what do growth and sustainability in this sector mean? What lies beyond micro-credit?

Discussing these questions with R Srinivasan and M S Sriram was an invited panel of experts which included Vijayalaxmi Das from Friends of Women's World Banking, Aloysius Fernandez of MYRADA, David Gibbons from Cashpor Services, Malcolm Harper of Cranfield University, Deep Joshi of PRADAN, M Udaia Kumar from Share Microfin, Vijay Mahajan of BASIX, Ramesh Ramanathan from Sanghamithra Rural Financial Services and Jayashree Vyas of Sewa Bank.

Explaining the attraction of microfinance for NGOs, Deep Joshi pointed out that NGOs readily adopt new ideas, especially if the resources required are small, entry and exit are easy, tasks are perceived to be simple and people's acceptance is high _ all perceived characteristics of microfinance. Moreover, the readiness of agencies worldwide to fund microfinance and the inherent appeal of forming `samuhas' or `organising', especially organising groups of women, are added attractions. But, Jayashree Vyas countered organising a group is not a simple task and that the edifice of microfinance has not entirely been supply driven. Hard-nosed lending agencies have taken to microfinance because of demonstrated sustainability and low costs of operation.

The interest of banks and other financial institutions in microfinance, expressed through schemes such as the successful SHG-bank linkage programme, the panelists put down to the `policy push' of the government, the low operating costs for banks which already have a vast network of branches in place, the cross-selling opportunities and the increasing recognition that the poor are `bankable'.

Vijay Mahajan detailed the three major models of delivery of microfinance which Malcolm Harper perceived as a time line, starting with the poorest in Grameen groups, going on to SHGs and finally with members graduating to individual loans.

Aloysius Fernandez questioned the assumption that the microfinance sector and the NGO-MFI animal have to grow to meet the total demand in the sector. To simultaneously involve the informal sector and keep the interest rates down, MFIs can provide part of the demand, he argued. Further, instead of encouraging NGO's to morph into MFIs, for which they are suited neither practically nor ideologically, the NGO should promote a separate financial institution, such as the MYRADA- promoted Sanghamithra. The growth strategy is to promote several not-for-profit Sanghamithras and a for-profit asset management institution which will monitor and mobilise funds, influence policy and represent the Sanghamithras. While agreeing with David Gibbons about the very real possibility of `poverty-focussed' programmes being hijacked by the non-poor, Fernandez drew attention to other ways of defining `the poor' than through the official definition of below-poverty-level criteria.

Ramesh Ramanathan's central concerns were about growth and sustainability. The key to these issues lay in the pricing of services and financial products as Sanghamitra discovered, pricing at 12% in rural areas where they were price takers and at 24% in urban areas, where they were price makers. Questions about the long term sustainability of the MFI (Is there a `sunset clause' for an MFI?), the actors in a sustainable growth model, and the role that they played over time still had to be resolved before recommending the Sanghamitra model as a replicable one.

All the participants agreed with David Gibbons that regardless of the microfinance methodology utilised, an integrated set of microfinance services, including savings, credit and insurance products, should be provided for the poor, as quickly as possible.