Factors Making Microfinance Economically Attractive Business and the Reasons of NGOs Taking up Microfinance
Deep Joshi, Executive Director of PRADAN responding to this question said that NGOs are always ready to adopt the new ideas. Particularly when the required resources are small, if it is easy to enter and exit and tasks are easy and simple to perform. One more important feature which attracts NGOs is the high acceptance of people. Microfinance has all these characters. Hence NGOs are entering in to microfinance sector. There are some examples which show the interest of NGOs towards new ideas. Such as adult education programme launched by Janata Party Government during 1997-1999; many NGOs which are not involved in education sector took up this one. Later some NGOs entered into waste land development project with out prior experience. Currently microfinance is the hot sector, attracting the NGOs. In addition to above characters many world wide funding agencies are ready to fund microfinance sector. It is like supply push. This is one more attracting feature attracting NGOs towards microfinance sector. Moreover forming groups or ‘samuhas' particularly forming women groups is an added attraction to microfinance. He also emphasizes that microfinance gives instant customer satisfaction, thus NGOs are attracted towards this sector. Finally he says that the microfinance gives financial sustainability for NGOs.
Jayashree Vyas, The Managing Director of Shree Mahila Sewa Sahakari Bank accepts the views of Deep Joshi about the quick and tangible satisfying results of microfinance. At the same she counters some views of Deep Josh about the formation of groups. Se says that the organizing the women or formation of women groups is not an easy task and microfinance is not completely supply driven. It requires a lot of hard work to organize the women. Many NGOs are taking many risks by lending to poor people who are considered as ‘non-bankable' by other financial organizations such as banks. Still many of the lending agencies are taking microfinance due to low operational costs and the sustainability. She totally opposes the supply push concept she says that the success of NGOs in microfinance is due to demand pull.
Vijay Mahajan, The Managing Director of BASIX gives a detailed information about the three models used in microfinance delivery such as Grammen groups , SHGs and finally the individual loans. He emphasizes that if the NGOs adopt the programmes which are working well and if funding is available for those programmes, nothing is wrong in that. But during the process some of NGOs are becoming financial intermediaries. This is not acceptable. Many funding agencies are ready to fund the NGOs working as social intermediaries. Microfinance has the social intermediary characters too. Hence NGOs are showing interest to take up microfinance.
Uday Kumar, The Managing Director of Share Microfin says that there are many models such as grameen replications, SHGs and other models proved microfinance is sustainable, even though it is focused for reaching poorest of the poor. Formation of groups is an easy task for SHGs because there is high demand for products of microfinance such as savings, credits and insurance. Hence NGOs are taking microfinance for their possessed reasons.
The main objective of the NGOs is poverty reduction. There are many evidences shows that the poor who are using the microfinance services and having access to other financial services are improving their economic condition both at family and individual level compared to other poor who are not availing microfinance services and are not having access to other financial services. Experience of BRAC clients gives statistical evidence. It shows that due to microfinance services the assets of households is increased by 112 percent and the expenditure by 28 percent. Grameen bank experience shows that the barrowers who are barrowing from more than eight years are came out from poverty now they are no longer poor. Bank Rakyat Indonesia situated in Lombok, Indonesia shows that 112 percent of clients' income is improved and 90 percent of clients came out of poverty. Microfinance sector fulfilling the both the objectives of NGOs those are poverty reduction and sustainability of the organization. By looking at all these evidences, other NGOs are taking up the microfinance.
The main objective of microfinance is filling gap between the demand for funds and supply in rural areas. This mixes with the objective of NGOs. Hence in the recent past many NGOs are transforming in to microfinance institutions with the objective of reaching the poor. In last 30 years NGOs proved through their work that they can lent the money with out keeping the collaterals. Generally poor are at more risk compared to other average borrowers borrowing from financial institutions. All the main stream financial institutions and MFIs keep the collaterals and securities to give credit. Poor do not have assets to use as collaterals but they need credit to meet their needs. So to serve the needs of poor by providing financial services with out collaterals NGOs are entering in to microfinance sector. So that the poor people can improve their income by enhancing their capacities to generate income. The approach of the NGOs is very flexible and they are responsive to the needs of clients and satisfaction of clients. Microfinance has all these characters. Due to this they are taking up the microfinance.
On the other side, NGO model have some negatives. The NGOs do not take seriously about the delivery cost of microfinance and inefficiencies. Because they generally operate in segmented, protected and sheltered environment. These factors threaten the sustainability of the organization. To overcome these deficiencies NGOs are considering the microfinance as a best alternative. Because microfinance increases the accessibility to capital so that the organization can expand it's financial services to the targeted group particularly poor.
“The sources of funding will diversify as private equity, institutional investors, fund managers, syndicated loans, capital market access will become available to a regulated MFI for both equity capital as well as for lines of credit in addition to the members' deposits. The weighted average cost of funding would come down under this scenario bringing in new borrowers under the MFI net. Second, it will improve the governance structure because of transparency, disclosure and reporting requirements imposed by the regulator. Improved governance and transparency will have positive and favorable impact on potential investors' perceptions and open up new sources of funding that would otherwise remain inaccessible under an unregulated NGO setup. Third, as these institutions will operate in a competitive environment efficiency gains and cost reductions will improve the cost of borrowing to the poor clients expanding the client base further. Finally, the institutional continuity can be assured even in the absence of the strong and charismatic leader or his dedicated disciples. Professional and trained managers man the key positions in the MFI and the boards provide strategic policy guidance and oversee the operations”. (ishrathusain.iba.edu.pk )
Opportunities in microfinance sector are increasing year after year. This is also one reason for NGOs taking up microfinance. There are many reasons for increase in opportunities. 2001 census shows that 72 percent rural population of India depends on agriculture, form and non form activities for survival. But the failure of policies related to reformation of agriculture decreasing the employment opportunities in agriculture. While, the employment rate is increasing in non agriculture sector. So contribution of agriculture to GDP is also decreasing. This is happening because of decline in self-employment, the availability of salaried and wage employment in agriculture. Many people moving to non form sector. Some times it may exceed the absorption capacity of non form sector. In order to stop this creation of self employment is required. Indian government gave importance for creation of self employment schemes in different five year plans. Other than government NGOs has to play a vital role in self employment creation for rural people. For this financial support is required. NGOs are providing financial services through microfinance.
NGO s has a very good base of clients, a good size of loan portfolio and knowledge. They have relationship and experience with the targeted clients. NGOs business model consists of appraising, originating, receiving and lending of loans with out any collaterals is suitable to turn in to microfinance sector. Some NGOs also developed technology for accounting, auditing, monitoring and for management. They have already established branches of network. All these intangible and tangible assets guides the NGO to take up the microfinance. It does not mean that if a NGO s starts microfinance it can not do it development works. It can continue its development work by providing financial services through microfinance.
Views of all the experts of NGOs and different sources gives 5 main reasons for NGOs taking up microfinance. NGOs are experts in organizing and forming groups or ‘samuhas' and some NGOs have already formed groups. This is an essential quality to take up microfinance, which NGOs have. Microfinance gives tangible and quick results. Entry and exit in to this sector is easy with optimum resources. It gives satisfaction to both organization and the clients. Moreover it gives financial sustainability to the NGOs.
1. What makes microfinance economically as attractive business? (n. d.). Retrieved on March 23, 2010 from http://www.hindu.com/biz/2005/03/14/stories/2005031400571600.htm
2. Husain, I. (n. d). Transformation of NGOs in to regulated Microfinance institutions. Retrieved on March 24, 2010 from ishrathusain.iba.edu.pk.