Strengthening the microfinancing mechanism

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 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.

Tap here to add The Daily Star as a trusted source

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 en trepreneurs 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 earning 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 eleven 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 to 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 midlevel 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 as 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 micro-financing process through improved use of communications technology. This 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.

Muhammad Zamir is a former Secretary and Ambassador.