Dr. Sourendra Nath Ghosal , Head (Knowledge Management) , Microfinance Focus
Micro financing institutions have emerged as a successful delivery model to garner savings of poor of course in a limited manner and to fund rural and urban poor to pursue any economic activities to enable them to earn their livelihood. It has been reported to have an average annual growth of 30% and have covered about 68 million people. (Vide STATE OF THE MICRO CREDIT SUMMIT CAMPAIGN REPORT –2003 and subsequent reports of CGAP). So much so good but an in depth analysis would reveal that yet these institutions have to go miles to achieve its ultimate objective of alleviation of poverty of poor and not just remain as an institution to fund immediate trading or farming needs of these people.
Some of the constraints in attaining the above objective that these institutions face as has been pointed out in various research studies (vide Presentations of CGAP & World Bank data) could be summed up as follows:
1. Inadequacy of donor funds particularly when compared to its insatiable demand; in fact one research study has revealed that on an average annual cash flow estimated for this sector is at least $5 billion but in fact donor funding is even below $1 billion;
2. Insufficient flow of funds from the private sectors as most of them consider such investment is risky if not ranked as unsafe;
3. Inadequate state support as most of the state funds are routed through political institutions for obvious reasons;
Above all these institutions source funds from commercial banks at high cost.
It is obvious therefore most of these institutions lend money at high rate of interest and despite this their margin as reported by most of them remain low and therefore they have very poor leverage to maneuver pricing of their products and services to suit the needs of poor, poorer and poorest. Hence the question of alleviation poverty relegates to background and only continuity and sustainability remain as primary or rather sole objective of these institutions. In fact social mission is dumped for obvious reasons by most of these institutions. Furthermore some smart management take advantage of poor people dependence and ignorance of financial natty gritty and impose other charges along with structuring interest rate on flat basis or at monthly rate to hide the higher load of interest they charge on these helpless poor.
It is therefore imperative to help them to source low cost funds to empower them to strategize their business with social mission of alleviation of poverty and also to pursue commercial viability for attaining sustainability which is indeed equally important. This fine tuning is feasible when mindset of state agencies and donor institutions could be changed so that they not only think these institutions are less risky as well more effective both in achieving social and commercial missions.
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Some of the constraints in attaining the above objective that these institutions face as has been pointed out in various research studies (vide Presentations of CGAP & World Bank data) could be summed up as follows:
1. Inadequacy of donor funds particularly when compared to its insatiable demand; in fact one research study has revealed that on an average annual cash flow estimated for this sector is at least $5 billion but in fact donor funding is even below $1 billion;
2. Insufficient flow of funds from the private sectors as most of them consider such investment is risky if not ranked as unsafe;
3. Inadequate state support as most of the state funds are routed through political institutions for obvious reasons;
Above all these institutions source funds from commercial banks at high cost.
It is obvious therefore most of these institutions lend money at high rate of interest and despite this their margin as reported by most of them remain low and therefore they have very poor leverage to maneuver pricing of their products and services to suit the needs of poor, poorer and poorest. Hence the question of alleviation poverty relegates to background and only continuity and sustainability remain as primary or rather sole objective of these institutions. In fact social mission is dumped for obvious reasons by most of these institutions. Furthermore some smart management take advantage of poor people dependence and ignorance of financial natty gritty and impose other charges along with structuring interest rate on flat basis or at monthly rate to hide the higher load of interest they charge on these helpless poor.
It is therefore imperative to help them to source low cost funds to empower them to strategize their business with social mission of alleviation of poverty and also to pursue commercial viability for attaining sustainability which is indeed equally important. This fine tuning is feasible when mindset of state agencies and donor institutions could be changed so that they not only think these institutions are less risky as well more effective both in achieving social and commercial missions.
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