Changing Trend in Microfinance

Prakash Raj Sharma, CEO, Laxmi Laghubitta Bittiya Sanstha Ltd. – Microfinance as it seen today was not same when it was started by Md. Yunus, a professor of economics in 1976. It was the “microcredit” at the start and was initiated from a small village of Bangladesh by providing credit to craftswomen who were struggling to deal with high cost borrowing in order to buy raw materials.  These crafts women used to borrow from local moneylenders but the interest rate charged by moneylenders was too high leaving negligible margin to those craftswomen. Md. Yunus, originally lent less than a dollar out of his pocket to each of a group of 42 poor families and found that they were capable of investing the money and paying back the loan near perfect reliability. Microfinance thus started from a noble cause of helping the poor to establish their own business.

From small beginning a global microfinance movement has developed. Microfinance was recognized by United Nations, declaring year 2005 as International Year of Microcredit. The Nobel committee also recognized it by giving Nobel Peace Prize to Yunus and Grameen Bank in 2006.

Over 400 years microfinance has transformed drastically. Started through an NGO and cooperatives as grass root movement, microfinance is now offered by specialized banks and institutions. BancoSol of Bolivia which is a commercial bank now serving more than 240 thousand clients was a small NGO in 1986. The well known “Grameen Bank . Bangladesh” started as a pilot project in 1976, is now a well established financial institution serving more than 9 million clients. In Nepal, Nirdhan Utthan Laghubitta Bittiya Sanstha Limited, started as an action research project in 1993 by an NGO “NIRDHAN”, is now serving over 321 thousand clients. Other well known microfinance bank of Nepal; Chhimek Laghubitta Biittiya Sanstha Limited, Swabalamban Laghubitta Bittiya Sanstha and Deprosc Laghubitta Bittiya Sanstha Limited all started microfinance through NGO and later created specialized financial institution to continue and expand microfinance services. Laxmi Laghubitta, a microfinance subsidiary of Laxmi bank is active in microfinance field of Nepal with new innovative products and services.

1. Subsidized to commercialization: Globally, there has been tremendous development in the field of microfinance in the recent years. In the 1970s government agencies were predominant in providing microcredit based on the assumption that poor cannot afford the market rate of interest and thus need subsidized form of credit. The donors and government fund was largely available to run such program. But within 10 years of operation of subsidized credit programs, the approach was largely criticized for making losses and requiring frequent capitalization to continue the operation.

Because of problem in continuing subsidized credit programs, a new approach was emerged in 1980s focusing on building up of local sustainable institutions to serve the poor. Microfinance institutions (MFIs) were emphasized to focus on twin objectives of increasing sustainability and deepening poverty outreach. The need to be sustainable has now been broadly accepted and stronger emphasis on poverty issue is to be continued.

MFIs are mostly dependent on borrowing from local banks and financial institutions to satisfy credit need their clients. But, when the microfinance industry grew in its shape and size, the need of alternative source of financing emerged to sustain the growth of microfinance industry. Many MFIs started to use the capital market to fund their growth and thus commercialization of microfinance started. The advocates of commercialization of microfinance argue that microfinance cannot scale from 205 million today to its potential market of 2.5 billion without the capital market. However, other people argue that the commercialization will lead to mission drift focusing more on profitability rather than social mission and objectives.

2. Solidarity group to Individual lending: Microfinance and group liability were considered as compliment for each other. May it be Grameen Bank in Bangladesh or village Banking of Latin America microfinance movement took momentum through group approach. Still many microfinance programs around the world believe in group approach. However, there are many more approaches are also being practiced by microfinance institutions. Individual lending is getting most of the attention now-a-days.

3. Microcredit to Microfinance: The next trend is supply of financial product. In the beginning microcredit was only the financial product to be offered from MFIs. But, realizing that poor people need variety of financial services not just the credit, savings, microinsurance, remittance and payment services were included in the service and thus "microfinance" replaced the "microcredit". Today, microfinance institutions not only provide credit but also provide savings, microinsurance and remittance services.

4. NGO to diverse suppliers:   Today there is existence of a larger and diverse pool of suppliers. Microfinance is no more being exclusively offered by NGOs and cooperatives only. Besides these, the active players in the sector are specialized microfinance banks, regulated non-bank financial institutions and commercial banks.

5. Self-regulation to prudent regulation: The next trend that we see is a radical transformation in supervision and regulation. Microfinance before was considered as NGO business and emphasis was on self-regulation only. But, Local governments/central banks are now trying to foster stringent supervision for fully regulated suppliers.

A fundamental change in financial priorities is the next trend seen in microfinance industry. Focus on self sustainability does not seem to be the greatest challenge any more. It has been seen that microfinance cannot be only self-sustainable but also can generate handsome income. The question is how the profit is shared among different stake holders.

The government, central bank, policy makers, practitioners and others associated with microfinance development need to act in line with the changing trend in microfinance so that a sustainable and responsible financial system for the poor goes on smoothly.     

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