Repayment in Microfinance - an analysis of savings and credit program in World Vision Lanka, Sri Lanka.
Keywords: Repayment, Microfinance, Loans, borrowers, World Vision Lanka
This section of the study outlines some theoretical arguments of the prior researches in relation to non repayment in microfinance. Over the last several decades, many experimental researches have been done related to microfinance and performance of repayment or arrears or delinquency. Understanding these research and research results, from the prior studies concerning this specific topic is very important, and it gives firm foundation for a smooth process of this research. This literature review includes critical review of the findings from prior researches which has been categorised under five main topics. This will make easy to understand the basic findings that relates to this study.
Since 1906, when the Thrift and Credit Co-operatives were established, small loans from some formal sectors had been provided in Sri Lanka to a certain group of the population. However real microfinance which is collateral free or group collateral based credit started only in 1980's following Grameen and other experiments which began in 1970's in other parts of the world. Both international and local NGOs tried out many small programs what then was called village revolving funds. Specifically the most significant microfinance program of any size was started only in 1986 by SEEDS of Sarvodaya, the then largest NGO of Sri Lanka. (Dulan De Silva - Vice Chairman of the CF Lanka Microfinance Company).
Presently Banks, NGOs and other formal and informal service providers are actively undertaking microfinance programs giving a great importance. The part of NGO's services in microfinance sector is very significant. A loan given by a market intermediary to a small scale of borrower is not appeared as microfinance. But, when a NGO provides a same loan to small scale of borrower, it is then called as microfinance. It is understood that microfinance is given with an impressive meaning and has organisational and non abusive connotations. The result confirms that characterize of microfinance is not by from whom, but the sense by the objective of the lender (Sriram and Upadhyayula 2004).
- Microfinance and Poverty Reduction
- Microfinance and Savings and Credit Groups
- Microfinance, Repayment and Delinquency
- Microfinance, Gender and Repayment
"The impact of microfinance on poverty reduction has been calculated in terms of several dimensions, such as improved income, employment and household expenditure, the reduced vulnerability to economic and social crises. These measurements have tended to focus on a specific geographic area, an institution or a small client group and are difficult to generalize or draw conclusions that reach across borders, income levels, gender or socio-economic status" (Bulletin on the eradication of poverty 2004).
According to Kurmanalieva, microfinance revolution has changed attitudes in the direction of helping the poor in many countries and in some, has provided substantial flows of credit, often to very low income groups or households, who would normally be excluded by conventional financial institutions. "Bangladesh is the starkest example of very poor country, where currently roughly one quarter of rural households is direct beneficiaries of these programs" (Khandker 2003; cited by Kurmanalieva 2003).
"Microfinance schemes are usually designed to encourage the underprivileged to increase their earnings, consolidate their properties and even gain a decent financial stability in life. The advantage of availing the microfinance over the more traditional means is the unwillingness of the later to serve the underprivileged people" (Sing 2008: cited by Yunus 2009). Robinson has defined microfinance as "small-scale financial services-primarily credit and savings-provided to people who farm, fish or herd" and furthermore, that "it refers to all types of financial services provided to low-income households and enterprises." (Robinson 2001)
According to Datta and white (Datta 2004, White 1991) microcredit programs define poverty, as a temporary one and simply "curable cash flow crisis". Instead of one which is indicates relations of inequality and their institutionalization in wide economic policy, micro finance program supports to the poverty alleviation, women empowerment and community enlargement (Pitt and Khandker 1998).
According to Marr's in the study of "Microfinance and Poverty Reduction-The problematic experience of Communal Banking in Peru" it had been argued that a set of incentives can be devised, without choice to public welfare funds, to accurate information asymmetries between borrowers and lenders in micro finance. Further the members of the group will work with mutual support because they too are from the poorer part of the society - indicative of a tendency in such studies to romanticise the nature of social kindred in community-based networks in the rural areas. His research has undertaken in urban and rural communities of Peru, and it has been presented in his study, that group-based microfinance schemes are frequently unable to harness local information, and hence usually impose more and more severe sanctions in order to obtain high repayment rates. It has been further mentioned in the study that these kinds of practices turn the other way round, and most possibly affect micro finance group cohesiveness badly and beat the poorest and most vulnerable people. At the end these will create more poverty, and damage the very foundations of microfinance schemes (Marr, A).
Matthews and Ali (2002) analysed about a savings led model for fighting poverty and discrimination. In his work, he mentioned that there will be a well documented of gratitude and land loss in one of the region that has had unfortunate consequences for the group of Adivaasis. Disasters, like drought or flood, will lead the crop to be unproductive. So to avoid from starvation, people will borrow money. Loans from local moneylenders provide loans with high interest rates, starting from the same of 100% per annum. Adivaasis too sell loans to their workers before two or three months earlier to the harvest at a reduction of up to 50%. This method is employed where the victim's family is uneducated and belongs to a disliked minority group. A study of community based Savings and Credit Cooperatives (SCC) in Nepal - a sustainable means for microfinance delivery had been conducted by Gingrich (2004). In that research, the financial performance of community based SCCs in Nepal and their ability to provide sustainable services was examined. The study found that Nepali Savings and Credit Cooperatives earn strong profits and prove important potential as sustainable microfinance institutions. These Savings and Credit Cooperatives are more or less fully financed by members' savings. It has been also mentioned that the main factor affecting SCC's profitability is the interest earned on loans (Gingrich 2004).
"A microfinance portfolio even with very low arrears can, within a few months, exhibit a dramatic rise in arrears, which can destroy the MFI" (Norell 2001). The risk that the borrower tends not to repay the interest and or the principal of the loan that he has received normally expressed as Credit Risk. In point of fact credit risk can be explained further as a risk of an unexpected change in the credit worth of the borrower that may go below the value of the loan. Credit risk, is not only taking into consideration the amount which is expected not to repay but also taking into consideration the inestimable value of the borrowers down grading. The effect of increased credit risk will smash up the whole group as it will reduce the total capital of the group and also the respect of members within the society. In the micro finance, the insolvency loss effect is the main element of credit risk. In microfinance the two important factors for delinquency or arrears are the interest rate and the instalment of repayment. Members with in a group need to consider the capital, donations, outside interest rate by other institutions and provisions for risk and profit while they decide about the rules and regulation for the whole system of micro finance for the group, and also decisions on interest rates (Torre and Vento 2006). Schreiner (2004) in one of his researches had mentioned that micro lenders provide small, short, unsecured loans to the self-employed poor people using microfinance as a strategy. Some of these borrowers have collateral for their loans, credit bureau records, or formal day pay jobs. In the past, lenders main challenge was to guess the risk of lending to the borrowers in microfinance. So it was hard for them to calculate the risk and to set up a suitable interest rate. The lenders were accused for usury if they set the interest rates of loans to overcome the costs of small loans, but if the lenders tend to set lower rates, then they will be in greater risk of losing money through interest (Schreiner 2004).
According Bond and Rai (2002), microfinance has defined a new way to reduce the cost of judging the credit risk of the self-employed poor in savings and credit groups as the responsibility is being partially passed on to that particular group itself. The group members are from the same community and know each member and their attitude it will be easy to them to judge the credit risk. At the other hand individual lenders control the risk through complete evaluations of the borrowers and their businesses, regular repayments, step of loan sizes, and collateral (Bond and Rai, 2002; cited by Schreiner 2004).
Desai (2007), in his work had mentioned the common practices for micro finance, regardless of the environments in which they function. "These are pinched from the Micro enterprises best practice project and do not abuse the idea that improvement strategies be context precise and not one-size-fits-all" (Desai 2207). The first common practice mentioned is that the service can be changed as to the local consumer population. This includes contribution and short-term loans or small loan, opening offices in available locations. The other practice is to function efficiently so that the MFIs can keep the costs down; like any other regular business. The decrease of unit costs will eventually benefit to the customers as it will bring down the minimum interest rates or functional and processing fees. The last one is that the on time repayment income, in which MFIs must concentrate a great deal and must encourage clients continuously.
Microfinance, financial service which was initially for poor people, has been able to achieve gigantically to reach out to women and improve their welfare. In the beginning when microfinance initiated and implemented the experimental schemes in Asia and Latin America in 1970s it has been above all matter of women. The objective of the Microcredit Summit Campaign, which plays a vital role in the promotion of microfinance, is "to ensure that 175 million of the world's poorest families, especially women, receive credit for self-employment and other financial and business services". The Nobel Committee highlighted the role of microcredit in women liberation when the Nobel Prize was awarded to Mohammad Yunus and the Grameen Bank (Espallier et al 2009, Norwegian Nobel Committee 2006; cited by Espallier et al 2009).
Micro Finance Institutions could take advantage in paying attention to the way they grow and devote the same attention to borrowers along time, pay attention to keep the reliable threat of dropping out bad borrowers. According to Fletschner (2009), demand for microfinance service is very high among women for many reasons. Commonly in many countries women are more credit constrained than men. They are very much restricted to access to finance and control over land and capital. In some countries women are considered less creditworthy by many traditional banks and even women do not even have legal right to open bank accounts in some other countries (Fletchner 2009, Agarwal 1994; cited by Espallier et al 2009). The beneficiary's involvement and the operating skills they have in the field where they work or be going to work will have a great impact in leading to a success of micro finance programmes. In the beneficiary selection process giving priority or more bias towards women members is usually followed by many micro finance institutions. It can be also noticed in Grameen banking in Bangladesh; most of the members in the groups are women. This has been generally developed because microfinance groups give importance for savings habits, and typically women concentrate more on savings (Torre and Vento 2006). I may conclude that the microfinance institution will take a quicker step to save its clients.
- Bond P., Rai A., (2002), Collateral Substitutes in Microfinance, Journal on A Survey on Microfinance on Developing Countries, pp 2-15
- Brett Matthews and Dr. Ahsan Ali Ashrai (2002). Savings Led Microfinance and the rural Poor, Journal on Microfinance, pp 1-11
- Chris Gingrich (2004). Community-Based Savings and Credit Cooperatives in Nepal, Journal on Microfinance, pp 1-8
- Datta and White (2004). Health Promotion International, Journal on Microcredit, pp 1-5
- Espallier et al 2009, Norwegian Nobel Committee 2006 Journal on Rural Microfinance and Employment, pp 5-20
- Khandker and Kurmanalieva (2003). The Microfinance and Poverty Reduction in Asia: Journal on Microfinance, pp 1
- Mark Schreiner (2004). Repayment Performance of Nepali Village Banks, Journal on Microfinance, Pp 11-35
- Marr, A (2008). Finance for the Poor, Journal on a Guide to Microfinance, pp 2-8
- Norell, D (2001). How to Reduce Arrears in Microfinance Institutions, Journal on Microfinance, pp 1-16
- Pitt and Shahid Khandker (1998). Microfinance and Poverty, Journal on the World Bank Economic Review, pp 263-286
- Sameeksha Desai (2007). Repayment and delinquency, Journal on Microfinance, pp 1- 18
- Sing and Laureate Mohammed Yunus (2009). The Microfinance and Poverty Reduction in Asia: Journal on Microfinance, pp 1-4
- Sriram, M S og Rajesh S Upadhyayula (2004). The Transformation of the Microfinance Sector in India: Journal of Microfinance, Vol.6, nr. Winter, pp 70-89