Fariduddin Chaudhari, Advisor to a Kuwait-based consultancy
Today, microfinance institutions (MFIs) finds itself on a sticky wicket when faced with the charge of levying high and opaque interest rates from borrowers, employment of goons to recover money from defaulters and of being responsible driving some borrowers to suicide. It appears that their latest strategy is to ask to just be allowed to coexist along with self-help groups (SHGs) and even moneylenders.
But this attitude misses the main point: that MFIs needs to reinvent itself to be able to stay as a hope for the poor. This article discusses a few important steps that need to be taken in this direction.
Banks must reduce their rates drastically: Banks lend to MFIs at around 12% while MFIs lent to borrowers at around 30% before the Andhra Pradesh ordinance and at about 24% after it.
As for administrative costs, these are much lower for banks and much higher for MFIs. For example, a bank may lend 100 crore to an MFI while the MFI will lend an average of 50,000 to no less than 20,000 borrowers; or 2,000 borrower groups if each group consists of 10 persons. It is, therefore, clear that the MFI has to work very hard to administer 20,000 or even 2,000 contracts.
The bank, on the other hand, has to maintain just one contract with the MFI. Before the AP ordinance, MFIs used to recoup a portion of their costs by charging 30% from borrowers. Why don’t banks consider lending to MFIs at a rate that reflects their actual costs and to charge no interest at all? This practice is followed by the Kuwait Fund for Arab Economic Development that lends, contrary to what its name suggests, to all Third World countries. No doubt, there are many other institutions in the world that follow this practice.
Banks can make up their loss, if any, by charging their corporate and other borrowers fractionally higher interest rates, though it would be ideal to have an across-the-board zero interest framework for all borrowers.
Give only productive and constructive loans: Banks must simultaneously bar MFIs from lending consumer goods loans. It might be best to give loans only for small businesses in a cooperative matrix like the Grameen Bank of Bangladesh (GBB) does. Loans could be given to individual borrowers for education and medical treatment as well. It may be tempting to include loans for marriage in the list – it may be better, however, to give such loans to group marriages which have an in-built economy of scale.
Turn MFIs to become a conduit for philanthrophy: MFIs can contemplate if they can convince philanthropist individuals and institutions in the country to give them a part of their charity for a fixed period. As poor a group as the Muslim community in India gives away a minimum of 10,500 crore in obligatory charity every year, mostly during the month of Ramzan.
This year’s Ramzan, corresponding to early August 2011, will be a good time to start working on this effort. An equal amount is spent by Muslim charitable trusts all over the country. Having said that, caveat is required here: most people think that this obligatory charity is meant only for poor Muslims but there are jurists who think that it can be given to non-Muslims as well as one of the eight heads of expenditure specified in the Qur’an is ‘for changing the hearts’.
So, it would be better if MFIs seek the support of such jurists when exploring the viability of this suggestion. A far bigger amount will be available from the rest of the middle class and rich Indians.
Make a bold step in zero interest microfinance: The Jamat-e-Islami Hind recently decided to open at least 500 zero-interest coop credit societies in India by 2016 under its social service vehicle called Vision 2016. This effort will have as its pilot the Al-Khair Cooperative Credit Society of Patna, which has managed to disburse 4 crore last year to the poor in the city and suburbs.
Should the plan succeed, they would be lending about 2,000 crore by 2016 throughout the country on a zero interest basis. There is every reason to believe that the whole operation will be run on secular, and not communal, lines.