What is microfinance?
Microfinance began as a financial system to provide poor
families with very small loans (microcredit) to help members
begin or sustain income-generating activities. Microcredit
arose in the 1970s, through the efforts of Mohammad Yunus, a
microfinance pioneer and founder of the Grameen Bank of
Bangladesh.
The definition of microfinance has since broadened, and
includes savings, insurance, and money transfer vehicles;
the industry has realized that those who lack access to
traditional formal financial institutions actually require
and desire a variety of financial products.
Microcredit has largely been directed by the non-profit
sector, but recently we see (as in the case of SKS) the
emergence of �for-profit� MFIs. In India, these �for-profit�
MFIs are referred to as Non-Banking Financial Companies (NBFCs).
What is a Microfinance Institution (MFI)?
A microfinance institution is an organization that offers
financial services to low income populations. Almost all
give loans to their members, and many offer insurance,
deposit and other services. Various types of institutions
offer microfinance: NBFCs, NGOs, cooperatives, private
commercial banks and sectors of government banks.
Some NGOs offer microcredit as one slice amongst a host of
non-financial development activities. SKS has opted instead
to focus solely on microfinance, to develop the most
efficient and effective mechanisms to deliver finance to the
poor.
How does microfinance help the poor?
Microfinance plays an important role in fighting the
multi-dimensional aspects of poverty. Microfinance increases
household income, which leads to attendant benefits:
increased food security, the building of assets, and an
increased likelihood of educating one�s children.
Microfinance is also a means for self-empowerment. It
enables the poor, especially women, to become economic
agents of change - they increase income, become
business-owners and reduce their vulnerability to external
shocks (illness, weather, etc)
When is microfinance not an appropriate tool?
Microcredit is best-suited to those with entrepreneurial
capability and opportunity. This translates to those poor
who work in growing economies, and who can undertake
activities that generate weekly stable incomes. Microfinance
is inclusive of a much larger range of clients.
However, many poor do not fit within the current structure
of microfinance. One reason for this is extremely poor
people (destitute and homeless) lack a stable income.
Without a stable income, it is difficult to make the weekly
repayments that microcredit requires. Credit requires a 98%
�hit� rate to be successful, as high default rates undermine
the very principles of lending.
Programs have been developed to provide these �very poor�
with safety net programs that offer basic subsistence. At
SKS, our NGO-arm, SKS Assist aims to do so, and endeavors to
graduate members to our microfinance program.
Why do MFIs charge such high interest rates to poor people?
Providing financial services to poor people is expensive.
This cost is one of the most important reasons why banks
don't make small loans. For example, a Rs.2000 loan requires
the same amount of resources as a Rs.100,000 loan.
Microfinance is a high-touch business: At SKS, field staff
managers must perform village surveys before entering a
village, conduct interviews with potential members, train
members on credit discipline, travel to villages by
motorbike every week to collect interest and disburse loans,
and follow-up to ensure the loans are being used for their
intended purpose. These personnel and administration costs
easily amount to 11% of our total cost structure.
In addition, we must borrow from commercial sources to lend
to our members. This cost of lending is anywhere from
10-12%. The combination of this personnel/administration
costs, the cost of lending, a 1-2% loan loss provision (due
to default or writing off a loan), and 1-2% profit used to
expand operations, translates to an interest that appears
high. However, it is the lowest possible interest we can
charge to cover our costs. As the microfinance industry
matures, and MFIs like SKS continue to scale and increase
efficiency, our cost of lending may reduce. And, if
commercial banks reduce their own rates, we can and will
deliver these savings to our borrowers.
How do you know microfinance is making an impact?
Microfinance has gained popularity for several reasons. One,
it is a much better alternative than the informal financial
sector. In India for example, moneylenders charge rates of
36-72%. Secondly, members realize the value of assured
long-term access to credit. Many SKS clients have been with
us since inception in 1998, and have consistently taken
loans each year.
This access to finance allows women to increase income,
which benefits the entire household. How do we know this?
Our return on investment (ROI) calculations demonstrate that
most borrowers earn anywhere from 25%-200% more than the
interest rate charged, due to low infrastructure costs, no
tax or legal costs, and the overall capital cost that is
just a small percentage of the total cost.
Why doesn�t SKS allow members to save?
SKS is an Non-Banking Financial Company (NBFC), and is
therefore regulated by the Reserve Bank of India (RBI). RBI
regulations do not allow NBFCs to hold savings deposits.
Why do you only lend to women?
Social development studies have demonstrated that women are
much more likely to reinvest income into the household, for
the benefit of the entire family.
Can microfinance be profitable?
Yes it can, as SKS demonstrates.
Data from the MicroBanking Bulletin reports that 63 of the
world's top MFIs had an average rate of return, after
adjusting for inflation and after taking out subsidies
programs might have received, of about 2.5% of total assets.
This lends to the hope that microfinance can be sufficiently
attractive for investors, as well as the mainstream into the
retail banking sector. |
