For many of the rural poor and socially-disadvantaged in developing countries, microfinancing is a key source of capital. With loans of just hundreds or even tens of dollars, this group, commonly known as “the under-banked”, has been able to jump-start small businesses of their own and achieve a certain level of economic success. As such, more lenders – both public and private – have been willing to accept the risks of working with this stratum of borrowers. However, with the global economy looking bleak and financial regulations tightening across the board, microfinancing activities have been sharply reduced.

The Banking with the Poor Network (BWTP) comprises NGOs, commercial banks and policy institutions from nine countries in Asia. Its main objective is to promote and develop microfinancing services in Asia through research, dialogue, advocacy and capacity building. Executive committee members of the BWTP spoke at the Singapore Management University (SMU) recently, at a seminar organised by SMU’s Lien Centre for Social Innovation.

Chandula Abeywickrema, BWTP’s chairman, described how four decades of “social upliftment, poverty alleviation and microfinance” initiatives have actually made lending to the poor a profitable opportunity. Financial literacy programmes have also enabled people at the bottom of the socio-economic pyramid to be more responsible and accountable for their own economic development. Though we may be in the midst of a deep recession, Chandula believes there is no better time to prove that microfinance borrowers are good, if not better than big companies at repaying their loans.

Mobile banking

Advancements in telecommunications penetration and technology have enabled many, especially those living in remote areas, access microfinance services, such as micro-credit, micro-savings, micro-insurance and remittance programmes. Chandula, who is also the Deputy General Manager (Personal Banking & Network management) of Sri Lanka’s largest private commercial bank, Hatton National Bank, noted that Sri Lanka has a relatively high mobile penetration rate. Access to mobile devices enables rural residents to post applications and perform transactions via the mobile platforms.

While most countries fuss over issues, such as the framework, regulations and security issues of performing banking operations over cellular networks, Sri Lanka has forged ahead with this highly popular platform, underscored by a joint venture between Dialog Telekom, the country’s largest mobile, and the National Development Bank, one of the country’s leading banks. Under the aegis of Sri Lanka’s central bank, the commercial project undergoes regulatory and legal checks – much like any other banking venture. “The legal framework and electronic technology are all in place and the e-commerce process has been approved. We’re moving to the next level, which is making sure that the extension of microfinance, micro-savings, loan disbursement and repayments, and remittances can be done through this network,” Chandula added. More banks, including some of the country’s biggest players, are expected to jump on board.

For an industry made up of mostly small set-ups, the entry of large financial institutions provides new opportunities. From Chandula’s perspective, large commercial banks are in the better position to “downscale”, so as to address the needs of microfinance markets. This is because they have the funds, the people, the expertise, the technology platforms and the ability to drive and facilitate ventures across different levels. “In Sri Lanka, many of the microfinance schemes are driven by NGOs, which are heavily donor-dependant. When donor-funding ceases, so will the initiatives. That is why the commercial banks are in a greater position,” he said.

It was only recently that large, commercial financial institutions have started to pay attention to microfinance. “They had always believed that 80% of their profit comes from 20% of their customers. The transaction costs of reaching the other 80% is too high and is therefore not profitable in the short term,” said Chandula. Thanks to improvements in technology, transaction costs have gone down. Physical presence in the form of “brick and mortar” bank branches, are no longer necessary for microfinancing transactions. Chandula argues, however, that it is just as important to build relationships with the 80% of minor borrowers. “The most important thing about it is the ‘graduating’ process, which needs commitment, passion and patience to see it come to pass. It’s like buying a calf; you need about three years for the calf to become a cow, then you can milk it,” he noted. Each year, between 8 to 10% of the bank’s microfinance customers have been able to grow their businesses into small and medium-sized enterprises. “We now have a significant number of microfinance customers who are on the threshold of crossing into the corporate level. So there’s a long-term opportunity for making profits,” said Chandula.

Full recovery

The outlook for microfinance in Sri Lanka has been encouraging. However, in Bangladesh, large microfinanciers have been facing great resistance. “State-owned commercial banks, given directives by the government, used to pump funds into micro-lending, mainly for agriculture. However, mindset and attitude problems, as well as bureaucracy, caused the programmes to fail,” said Md Abdul Awal, director of Credit and Development Forum Bangladesh (CDF), a network of 1,500 microfinance institutions. Together with a number of NGOs, CDF stuck its neck out to guarantee microfinance loans. It was a risky move but one that paid off - Sonali Bank, for one, the largest Bangladesh Banks, was able to recover all of its funds after the three-year loan period. This made the commercial banks realise that microfinancing is more than a social obligation -- it also makes business sense. Today, some 150 microfinance institutions have gained access to the funding from 15 commercial banks.

Banks in Bangladesh have been fortunate to have had responsible microfinance borrowers. They are not alone. The Industrial Commercial Bank of Vietnam, a wholesale lender behind numerous microfinance institutions, has seen the same fortunes. Their borrowers consist of mainly farmers who can easily repay their loans by selling their harvest - chickens, eggs and vegetables. “They can repay anytime. It’s easy to manage risk. Before the financial crisis, we thought that investment banking is profitable. But now, it has turned out to be more risky than microfinance,” said Nhan Phan Cu, director of the International Co-operation Department of the Vietnam Bank for Social Policies (VBSP), a government-owned microfinance bank.

VBSP has deployed various “mobile transaction points”, aimed at reaching out to every commune in the country, including those in the remote mountainous regions. The programmes have been successful at targeting farmers, migrant workers, disadvantaged ethnic minorities and students. They receive the funds either directly from the banks or through unions. “After operating for five years, we have helped lift over 1.2 million people out of poverty, created 1.4 million new jobs, and enabled more than 630,000 students to continue their studies. We have also reduced the poverty rate from 20% in 2004 to 13% in 2008,” Nhan added.

Women

While microfinance has benefited many, the group that has been given the biggest boost is that of women – often otherwise overlooked, and disadvantaged. The Shakti Foundation for Disdvantaged Women has been addressing this specifically in Bangladesh, targeting women who live in slums. Syeda Obaida Haque, the foundation’s director, believes that many of the women she has worked with have had great ideas for money-making ventures but have no easy access to funds.

On top of providing funds for women, the Shakti Foundation provides primary healthcare support, training on gender awareness issues and business management skills. Women taking part in the foundation’s programmes meet regularly at their local centres where they can also repay their loan installments and have their business proposals undergo peer evaluation. “When we can develop a woman’s income, she can support her family,” she said. The foundation also runs financial literacy programmes. Never mind the fact that half of its target group might be illiterate - “They have very good numerical knowledge,” pointed out Haque. The foundation’s financial literacy programme has been organised into three levels: those who are totally illiterate, those who are semi-literate, and those who can read and write. To date, the foundation has reached out to 250,000 households, providing them with holistic support – credit, know-how and consultations.

Not micro

End of the day, microfinance, as a business, is not as its name suggests – small. There are large markets to tap into. Banks are not the only sources of funds within a developing economy. Remittance from migrant workers – while in relatively small individual amounts – can add up to a potential torrent of capital for microfinancing. Sri Lanka, for example, has nearly 10% of its citizens working in elsewhere in Asia, Europe and the Middle East. In 2008, nearly three billion dollars were remitted in total -- enough to qualify as the country’s third largest source of foreign exchange.

For what microfinance lacks in depth, it makes up in volume; businesses in savings, insurance, lending and products linking migrant remittance to microfinance have been successful and profitable. “The margins are less, but these are good margins, and we make money on the numbers. We are doing small things in a big way and making a significant contribution to the bottom line,” said Chandula.