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UNITED NATIONS CAPITAL DEVELOPMENT FUND Microfinance |
Issue 2 / March - April 2004 |
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Voices of Microfinance Thank you to all those who contributed their expertise to provide valuable insight into the following question: Why is it that so many bankable poor and low-income people still have no access to financial services? Or differently stated, why are the financial sectors exclusive in most developing countries leaving a large part of the general public with no access to financial services? Lack of physical access - the branches being far away; lack of literacy making banking a terrible experience; lack of collateral to obtain credit; small transactions which do not interest the bankers; apathy of bank staff who aspire for high-finance and elite banking; unfriendly design of products and services making them ill-suited to meet the needs of the poor. A bank’s perception of risk about the poor people's “bankability” compounds these reasons for low access to financial services for the poor. — N. Srinivasan
— Drew
Tulchin The answer in short is poor information and bad loan products. Many more people can have access to some sort of savings account as the minimum deposits get smaller and smaller (just $5 in Uganda). The principal problem however is access to loans. This problem exists because banks cannot check credit history since there are no credit bureaus with an adequate database. They therefore must do individual credit assessments that make the process expensive. People don’t qualify because they don’t have an acceptable security. For cash-flow based lending - which is the ideal form - credit assessment requires a good knowledge of the borrower together with a personalized relationship to secure loyalty and commitment on both sides. These conditions are lacking in most banks and in many MFI’s. Post-loan enforcement problems such as a weak judiciary contribute to the unwillingness of banks/MFI’s to lend. Most MFIs only offer short-term loans for 6 to 9 months with weekly payments; this is unsuitable for larger loans (USD $500 to $2000) that can make a difference for start-ups or ongoing small businesses. What is needed is an ongoing line of credit served door to door. Principal repayment often can take away working capital or even the initial investment from a small business. Business people are prepared to pay high interest (i.e. share their revenue with the lender) but keep the principal to run their business. — Dr.
Ahmad Jazayeri The poor have different considerations and priorities. The current microfinance initiatives tend to omit this fact. In Islamic countries, for example, the poor usually have customs against interest, they consider it unlawful and they prefer Islamic banking principles. We have to consider the priorities of the poor and put ourselves inside their mode of thinking if we are to provide them with financial services. — Kais
Aliriani Formal banks here are interested in profit and the smaller loans aren't as profitable for them compared to the larger loans they are used to making. Expanding in this sector requires new systems, new policies, new training, new framework and a whole revolution in risk analysis. The NGO sector is small and way under-financed so that even though they have strong demand for services from this sector, they have no way to fill that demand. As the Dominican Republic is not considered a "really poor country", there are very few sources of soft capital. Commercial capital is 50% or higher; inflation is too high to access loans in euros or US$. — Andrea
Findley Families with low incomes should have access not only to financial services but also to be able to use the assets received as a micro loan to make a profit. They also need an enabling legal, regulatory, and fiscal environment, that grant access to a market (to buy inputs and to sell their products). As such, microfinance is often not successful as a separate intervention, but only as an integrated part of a broad set of programmes, involving business support, infrastructure development, institutional development, other tools and elements. Microfinance is a means of financial intermediation, and such, it is about business. A different type of business, but still a business, which aims at mobilizing financial resources at lower segments of financial market and re-distributing those at the same lower level. — Bakhodur
Eshonov In Russia, one reason why so little financial access is available to less affluent people is because Central Bank rules make it difficult if not impossible for commercial banks to service less affluent people. The banks in Russia are not just intermediaries, but also carry out certain state functions related to taxation and other controls. This, in addition to tough rules on what is considered adequate collateralization, cuts off many people from mainstream financial services. — J.
Michael Harvey Few realize that remittance transfers can be a tool for accelerating economic development and can contribute to more sustainable livelihood choices for the poor people of the Americas. Considering the fact that remittances often exceed the largest other sources of foreign national income, one can imagine the developmental impact remittances could make as one of the largest potential sources of capital that could be leveraged for boosting microfinance efforts in many poor regions, bringing previously unbanked immigrants into the financial mainstream, and opening the way for sizable new capital flows to small financial institutions in underdeveloped regions of the world. — Daniel
A. Weiss Addressing the second part of the question "why are financial services ...leaving a large part of the general public with no access to financial services?" the microfinance community may be looking at the problem through the wrong lens. The issue is not only credit delivery to the poor, but also providing simple training and support to those outside the reach of financial services so that they can mobilize their own savings and lend to each other at interest through self-help groups that they manage. The secret of success: leverage what is already in place -- groups, local NGOs; keep it simple and low cost; don't touch the money, let the groups manage their own funds; see assistance as time limited - 18 months and out; define sustainability of groups operating completely on their own; define success as groups creating their own groups as benefits ripple out to poorer communities. — Jeffrey
Ashe Forced lending is a dangerous
idea. The laws of supply and demand dictate that if price for delivery is fixed,
there will be a flight of supply. Additional restrictions would also have the
perverse result of reducing the number of competitors as foreign financial institutions
would be unwilling to enter a market where their risks rise while returns do
not. Microfinance organizations must also be willing to change in order to attract
commercial lending. Profit is not the enemy of servicing the poor considering
that the basic requirement of all commercial organizations is that they seek
to meet the needs of clients. It is inadequate to expect commercial funding
while acting in uncommercial ways. Arbitrary restrictions as have been proposed
add significant costs to the lending structure of organizations. Particularly
for microfinance, adding constraints like targeted rural lending, maximum lending
levels, targeted average loan sizes, inflexible interest rate policies, (and
the list goes on) - all take away from the idea of a service driven organization
that serves the needs of clients – as opposed to the needs of political
masters. — Clement
Wan |
