MICRO financing services offer the poor a path to traverse out of poverty. But this way out from poverty has proved very long and tedious due to limited nature of MFIs’ existing operations, which is confined to disbursement of credit for micro businesses and at the most, accepting deposits of their members.
MFIs are confined to the niche of development community. The poor need to avail all financial services normally offered by conventional commercial banks like transfer of funds from one place to another, a variety of profitable saving products and also credit schemes to meet both business and consumption needs.
The MFIs and microfinance banks have reservations about cost, risk and inconvenience involved. No doubt, to enable the poor to avail collateral free institutional credit, MFIs and Micro Finance Banks (MFBs) have developed new credit techniques to cover the risk against clean loan like loaning against group / communal guarantee and also on the basis of funds and cash flow position of micro business in need of credit.
Through experience it has been proved that poor are credit worthy. They are prompt in repayment of loan despite comparatively higher rate of interest / mark up being charged on loans in view of high administrative cost involved. However the rate of mark up charged is much lesser than what is charged by private moneylenders.
Today a challenge for MFIs is finding ways to integrate full range of micro finance services with mainstream financial systems. Apart from credit, clients need peace of mind by securing their savings through placement with banks/financial institutions. They make use of crude ways of transferring funds. They need to avail proper fund transfer arrangements and also safe custody/ lockers facilities for securing their valuables.
In the absence of these basic financial services, they resort to hold their valuables and savings at home, which are subject to risk of theft in view of unsecured and vulnerable housing environments.
Now there is a global move to allow MFIs to collect deposits and to offer other conventional financial services, to get them integrated into country’s mainstream of financial system. Apart from introducing conventional saving schemes, MFIs need to launch innovative profitable saving products to motivate poor to save. This would not only enhance the tangible assets of poor, but also provide weightage to eligibility criteria for the loan to be applied by him/her in future.
The saving schemes package with incentive of insurance against accidental deaths already introduced by few conventional and micro finance banks is beneficial for clients’ legal heirs and bank itself in case client had availed credit facility from the bank. The insured amount assessed on the basis of client’s last balance with the bank is normally sufficient to settle the micro loan balance amount.
Similarly, conventional loan products offered by MFIs and MFBs generally meet and facilitate clients’ business needs. There should be provision of consumer financing products like loans for purchasing mobile phones and other electronic items essentially needed for conduct of business and housing finance for improvement and enhancement of accommodation as micro- businesses are normally home based both in urban and rural areas.
Since inter-dependency has multiplied due to increase in both internal and external trade, clients of MFIs and MFBs doing viable business automatically develop direct marketing links unlike old system of marketing through middle man, hence need of funds transfer facility arises.
Conventional financial institutions are generally out of reach of poor population. As such MFIs and MFBs need to offer automated and secure fund transfer facility to their clients. To make life easy for poorest of the poor and to achieve millenium goal of eradicating poverty, MFIs operating in the country must offer all the financial services to this segment of population at comparatively lower rate of tariffs.
Only a few cater to business and consumption needs of their clients. Saving schemes also provide insurance cover against accidental death of the client. Housing improvement scheme has been launched by a few MFIs for improving living conditions of the poor population. Khushhali Bank, which is a public sector bank and has extensive countrywide outreach to poor, need to offer wide range of financial services in demand from financially disadvantaged population.
It is true that only financially sound and viable MFIs can offer a wide range of financial services. Accordingly, to promote micro financing, emphasis has been on achieving sustainability at the very initial stage of MFIs/MFBs starting operations.
Almost all microfinance banks are using the techniques and disciplines of commercial finance. They are investing in sophisticated management and information system, applying international accounting standards and as per prudential regulations specifically meant for MFIs and MFBs have inducted reputed Chartered Accountant firms as their external auditors and seeking rating from commercial rating agencies.
Some of the MFIs are striving to make use of latest technology and management information system in order to make their services accessible to poorest of the poor in far-flung areas without involving additional administrative cost and risk.
One of the MFBs is in the process of setting up booth offices in rural and far-flung areas linking clients with bank’s fully automated branches through satellite. This will tremendously increase the accessibility of bank’s services to less developed areas and at the same time would ensure meeting administrative, and procedural requirements. The system would be cost effective, as it will save capital expenditures and recurring cost involved in having a full-fledged branch in a remote area, where viability of operations is doubtful.
In quite a number of countries, MFIs have experimented with a move to combine credit with training for capacity building and skill updating of the borrowers running micro businesses. However to make the training program itself self-sustaining, it can be organized on commercial basis in collaboration with non-governmental organizations and other relevant agencies.
In fact these are appropriate forums to provide information regarding market, profitable business opportunities and explaining market risk in different situations and how to cope with it. Skill development training programs can be arranged for clients in rural and remote areas of the country also, through mobile squads of trainers.
Globally, it has been established that micro finance banks are less vulnerable to economic upheavals resultant of internal and external shocks experienced by the economy. In case of Pakistan also during the period from mid eighties to mid nineties when economy was passing through turbulent time, the volume of non-performing loans of MFIs was much less than conventional commercial banks. Hence to enable MFIs to play an effective role in making the masses economically empowered, there is need to integrate conventional micro financing with mainstream financial services.
