What stops microfinance?
The idea of giving highinterest loans to people who earn a dollar a day has been controversial from the start. Examples have been cited of people becoming overwhelmed with debt – something that should not happen in microcredit, where the money is borrowed by a pool of people who help one another with the repayments.
The problem arose when the microfinancing institutions decided to become more profitable ahead of making their companies public and selling loans as packages of securities. There have also been cases where the other borrowers in the pool were urged to seize the debtor’s chairs, utensils, and wardrobe and pawn them to make loan payments.
Should there be an end to putting the very poor into debt and use charity instead?
Muhammad Younus, the creator of the microcredit concept, has answered this wisely though, “When we created microfinance, we had no intention of making money. It is a business, because it has to be – meaning that it covers its costs, it makes a profit. But profit for the company, not for yourself. I don’t want to take money from it.”
In accordance with this philosophy, microloans work when very poor people are trying to get out of their situation, usually, in order to enter a proper labour market. The loan provides the means to improve one’s life, and its repayment is the incentive. Younus says, “If you want to encourage people to earn, encourage people to change their culture, you have to make the roadway for them to do that – remove the barrier.”
To respond to speculations over high interest rates, Younus endorses the fact that microloans must have interest rates as high as to cover their basic cost. If they do not do so, the pool of capital will disappear fast, and there won’t be any more loans.
“The reason this works better than charity is because charity is dependent on an external infusion of money, and the moment that infusion stops, the whole thing stops. So that’s not sustainable. If you design it as a business, it continues, it never stops, because it has its own steam.”
According to Younus, the difference between a microfinance institution and a Money Mart offering a highinterest, profit- making loan to the poor is all in the organization of payments, the collateral and the penalties, where the latter two are basically non- existent in traditional microloans.
In the context of Pakistan, it is one of the few countries and one of the first ones which promulgated a separate legal and regulatory framework for microfinance banks. Sector experts appreciate the role of the State Bank of Pakistan in this regard; the Bank has guided the industry in an extremely professional manner by regulating financial institutions which do not rely on grants but on market- based resources to become selfreliant.
According to Hussain Tejany, former President, First MicroFinance Bank, “MFIs need to address all the causes of poverty by not only offering financial services for income generating activities but also to help create access and affordability to health, education and housing service. There needs to be an effort to improve the overall quality of life of the under- privileged segment.”
He suggested, “Key players in the sector must make concerted efforts to focus on institutional development to ensure that their structure is kept sustainable. It is only through developing an efficient financial system which performs the function of intermediation between those with excess savings and those in need of funding for activities with high returns. Additionally, reliable and sustainable structure will allow MFIs to generate as much resources as required for growth.”
“In recent years, SBP has taken various steps for the promotion and growth of this sector. Also, a strategy for ‘ Expanding Microfinance Outreach’ ( EMO) had been developed by the SBP which was approved by the Government. For the microfinance sector to flourish, it is imperative that there is consistency in the policies and that a conducive policy environment prevails for the micro- finance players in Pakistan.”