Microfinance: outreach and self-sufficiency

Updated: Jan 20 2007, 05:30am hrs
In the context of the challenging task of meeting the United Nation's Millennium Development Goals, microfinance must reach very large numbers of very poor clients and create the desired impact (see Microfinance and millennium development goals, January 19). In the process, microfinance institutions (MFIs) must remain operationally self-sufficient. This would broadly mean that cash income earned from programme operations is sufficient to cover cash expenses to maintain the programme, including the cost of funds and loan-loss provision. Accordingly, MFIs need to ensure that net gains accruing to the clients are positive (the value of the product to the individual client/household, that is, minus the sum of 'price costs' in terms of direct cash payments for interest and fees, and transaction costs, in terms of both non-cash opportunity costs and indirect expenses on transport, documentation, food and taxes).

This would be critical in determining the demand for MFI products by poor households, minimising the incidence of loan defaults and loan losses, and guaranteeing MFIs operational viability. Initially, however, in view of the clients being destitute (below the poverty line, with annual per capita expenditure less than $360), operations may need to be subsidised through grants or soft loans/investments that yield below market-rates of return or no return at all.

Microfinance has seen several innovations. Notably, group lending with joint responsibility, flexible approaches to collateral requirements, high-frequency installment payment schedules, future access to credit denied in the event of default, exclusive focus on women and development of high empathy levels amongst credit officers who reach out to the poor. These innovations have made it commercially feasible to reach many many clients. This can be done by a specialised MFI or as a distinct line of services offered by a commercial bank or a credit union seeking to go downmarket. A combination of products and delivery systems must be developed to satisfy clients. The differences in relative emphasis affect the design and management of microfinance products, delivery systems and even institutions. Different motives lead to different methods. Fin-ancial systems should be so developed as to lower the cost and increase the convenience of financial services, so that the unbanked masses can be reached by commercially viable enterprises. There are 41 microfinance programmes in operation in 17 countries, including Grameen Bank and BRAC in Bangladesh, which qualify as leaders in terms of scale of deep outreach and sustainability of the institutions.

Microfinance accounts for 40% of the reduction of moderate poverty in rural Bangladesh, according to some measures. It works especially well for women
While 41 microfinance programmes (28 in six countries of Asia, nine in seven countries of Africa and four in four countries of Latin America) have exceeded two benchmarks (scale and sustainability), five programmes (Grameen Bank, BRAC,ASA) in Bangladesh, SHARE in India and CARD in the Philippines have also showed evidence of having reduced poverty. In Bangladesh, among programme participants who had been members since 1991-92, poverty rates declined by more than 20 percentage points in seven years (about 3 points per year). More than half of this reduction is directly attributable to microfinance, and the impact is greater for those starting in extreme poverty than in moderate poverty2.2 percentage points and 1.6 percentage points per year, respectively. Microfinance, thus, accounts for 40% of the entire reduction of moderate poverty in rural Bangladesh. Access to microfinance works especially well for female participants, as studies have shown. In India, in the case of SEWA, particpants in such programmes report higher income, and this is especially so for women, whether savers or not. Despite these programmes in India having been under implementation since 1993, however, concrete evidence of poverty-alleviation, womens empowerment and achievement of MDGs is hard to find. The task of awareness on the human development aspects still needs to be undertaken in collaboration with industries and social organisations that promote education, seek to eliminate gender disparities, reduce mortality rates and offer access to reproductive health services. For this, the following need attention:

1. Evaluation of existing microfinance programmes by independent institutions to study the extent to which impacts have been created, focusing on deficiencies, and suggesting corrective steps

2. Governments must crystalise in their Eleventh Five Year Plan documents and annual budgets, microfinance policies and plans, allocation of funds, strategy, monitoring, compliance and review mechanisms. Adequate infrastructure must be in place.

3. Potential Linked Credit Plan of each district formulated by National Bank must focus the strategic action plan.

4. National Bank, SIDBI and commercial banks may need to arrange for training of personnel and evaluate the effectiveness of the same.

5. Effective coordination must be established among MFIs and government departments.

6. NGOs and banks to review the progress and initiate corrective steps.

7. Involve Panchayati Raj Institutions right from village to district levels to implement the programmes

8. Commercial banks, RRBs and cooperative banks must, learning lessons from other countries, commit and involve themselves to form and finance self-help groups (SHGs), monitor their progress and guide them to achieve results consistent with the goals that have been set.


The authors are professionals with decades of field experience in microfinance planning