MICRO CREDIT: FINANCE SPECTRUM

PROF. DR. KHAWAJA AMJAD SAEED
(KAMJADSAEED@YAHOO.COM)

June 02 - 08, 2008

The latest approach to understanding finance addresses basically two issues namely, maximizing returns and minimizing risks. However, considering the level of persons serving in the micro level sector in developing countries, it is advisable to apply and extend the conventional model which consists of four aspects and are listed below:

1. Resource mobilization
2. Resource utilization
3. Protection of financial resources
4. Distribution of returns

These are briefly described below:

1. RESOURCE MOBILIZATION

There were times when hardly any money was available for microfinance. The earlier monetary policy did not bother above providing guidance for commitment and allocation for microfinance. Commercial banks preferred to cater after the needs of big business. However, since gap between haves and have-nots continued to grow, social tensions started mounting up and social activists started ventilating their voices. Governments were under pressures. Even riots had been taking place. The demand for an accelerated economic growth with social justice has continued and increased. Consequently all the stakeholders have started voicing their feelings. In this backdrop, financial institutions were given a wake up call and therefore today several windows have opened up for providing finance for micro enterprises - open to men and women. In this piece, it is difficult to list all available windows. However, some current positive trends are explained below:

1. World Bank (WB) has responded positively. However, their non-proactive attitude is a matter of regret. Steady start has now been undertaken by them. They need to do much more than the small level with which they have started.

2. International Finance Corporation (IFC), the lending arm of WB for private sector, is also becoming serious. Over and above the commitment of funds for assistance to establish micro-finance institutions through taking equity position, special attention has been given to troubled and war-torn countries e.g. Iraq, Lebanon, Afghanistan etc. Funds were disbursed with positive results. Another independent piece is being written in respect of IFC's productive experience in respect of micro-finance.

3. Regional banks e.g. African Development Bank, Islamic Development Bank, Asian Development Bank etc. have been keenly interested in micro-enterprises projects with a sanguine hope of poverty alleviation, employment promotion, prosperity on wide spread and socio-economic development. This is highly laudable and one hopes that their interest in the foregoing areas will continue to grow.

4. A momentum is building up in developing network. One fine example is Sanabel which, during May 06 08, 2008 held their Fifth Annual Conference in Tunis with an exciting theme namely, "Advancing Arab Microfinance: Greater Social Impact through Inclusive Financial Systems". This was attended by nearly five hundred participants largely drawn from MENA (*) region. The author was invited to address the above Conference held in Tunisia. It addressed several interesting themes namely, developing Islamic products, financial sustainability and profitability, Shariah complaint approach, cost reduction, pricing, product differentiation, Conventional vs Islamic banking, Takaful, social impact of micro-enterprises, developing new products, innovative approaches to micro-finance, operation, technology etc.

*Middle East and North Africa

5. NGOs have been playing a useful role in micro-finance activities and, overtime, these have graduated to become micro-finance institutions (MFI's).

6. The existing commercial banking set ups have been offering micro-finance through establishing special windows, stand alone branches and even through exclusively establishing MFIs. Some of these are being listed on the stock markets.

The foregoing details throw some light as to how MFIs are now rendering useful services and the future augurs well.

An all out effort must be aggressively undertaken by all stakeholders to ensure that funds are available at an affordable cost for financing micro-enterprises.

2. RESOURCE UTILIZATION

Practically resource utilization has two components namely, development (generally referred to as Projects) and working capital. Project Finance, speaking historically, emerged as a strong area of financing by DFIs and lately even commercial banks have also been actively extending financial assistance for projects. Currently, a new type of financial institution namely MFI (Micro Credit Finance Institution) has come into existence. Its steady expansion in developing countries is a happy augury and will, in due course of time, this institutional set up will continue to grow and flourish as solid logical support to micro-credit to pave the way for ushering in prosperity in wider perspective to ensure narrowing the gap between haves and have nots. Higher standard of living will become an achievable target. There are two approaches to identification of projects for financing. At times, the potential borrower selects a project of his / her choice and presents it for requesting for credit to finance it. Sometime, based on need assessment, the lenders have a list of projects for which financing is available. These pre-qualified projects are available for financing.

An optimal mix of the above two is also an available choice. The selection of projects is based on export orientation and / or forward linkages. This will require value chain to be created in an integrated manner through a well spelled out industrial policy giving a pronounced importance to SMEs through their linkages to large scale and high tech industries.

Working capital needs are also important. This financing is based on the assumption of cash generation for which breakthrough effort to boost sale is the crying need. Short and easy to comprehend training courses relating to essentials of financial management should be offered in native language as a logistical support for proper use of financial resources.

3. PROTECTION OF FINANCIAL RESOURCES

Financial resources enjoy a very high stake in business. These need to be well protected against all possible risks. The first aspect of the risk is to identify it, mitigate and finally manage it. In this respect, RMMM (*) is a famous approach. This needs to be carefully comprehended and implemented. In this respect some categories of risks (general and specific) are captured in the following two boxes:

 

BOX NO. 1
GENERAL RISK CATEGORIES

CATEGORIES OF RISK

Operational Details

1. Known

Can be uncovered after:

a) Careful evaluation of the project plan

b) Reliable information sources:

* Unrealistic delivery date

* Lack of documented requirements

2. Predictable

Extrapolated from past project experience:

* Staff turnover

* Poor communication with the customer

* Dilution of staff effort as ongoing maintenance -

3. Unpredictable

Requests are serviced

These can and do occur but are difficult to identify in advance

(*) Risk, Mitigation, Monitoring & Management

BOX NO: 2
SPECIFIC RISK CATEGORIES

NAME

FOCUS

1. Project Risks

Threaten Project Plan:

* Budget

* Schedule

* Personnel

* Resource

* Customer

2. Technical Risks

Quality and Timeliness:

* Design

* Implementation

* Verification

* Maintenance

* Threaten Viability

* Market Risk

* Strategic Risk

* Sales force does not know how to sell

* Management Risk (Lack of support

* Budget Risk

A comprehensive chart identifying all possible types of risks is included in the following Box:

BOX NO: 3
SIGNIFICANT TYPES OF RISKS

TYPES

DETAILS

1. Pure

Prospects of loss - Plant: file

2. Speculative

Investment in marketable securities

3. Demand

Sales or services

4. Input

Material, labour, overheads

5. Financial

Financial transactions - Bonds rates .. Interest Rates, Future, etc.

6. Property

Destruction of productive assets: force, floods, riots.

7. Personnel

Fraud or embezzlement

8. Environment

Pollution - Clean up cost

9. Liability

Health Care providers, safety

Suggested risks items check-list is as under:

1.

Product Size - "overall size"

2.

Business Impact - "constraints imposed"

3.

Customer Characteristics - "Ability to communicate"

4.

Process Definition - "Process"

5.

Development Environment - "Tools"

6.

Technology to be built - "newness"

7.

Staff size and experience - "Technical or project experience"

Three stages are involved in the process of managing risks. These include: risk identification, visualizing and quantifying the impact of risks and finally the art and craft of handling risks. The following boxes present important aspects in this respect:

BOX NO: 4
PROCESS OF MANAGING RISKS

FOCUS

DETAILS

1. Risk Identification

Potential risks

2. Impact of risk

Immaterial

Potential Impact

3.

Insurance

Third party - shipping

Derivative Contracts

Hedge

Financial derivatives - interest

rates and exchange rates

Reduce probability of occurrence

Preventive approach

Reduce magnitude

Reinsurance

Total avoidance

Discontinue a product / service

4. DISTRIBUTION OF RETURN

The internally generated funds may be either distributed as dividend to shareholders or recycled and reinvested for the development of the Micro Sector enterprise.