MICRO FINANCE AND POVERTY ALLEVIATION

WHO WILL TELL US WHAT'S GOING ON?

SHAMSUL GHANI
0345 3133210
shams_ghani@hotmail.com

Apr 28 - May 11, 2008

Government claims that poverty level, during 2001-04, has been reduced from 33% to 23% The World Bank and Asian Development Bank, by taking the claim with a pinch of salt, have asserted that the reduction has been to a level of 28%. While the claim and "correction" have now become a norm, one really feels disturbed at not having access to poverty info after 2004. In the face of a killing food inflation and soaring fuel prices, one needs not to be an economist to conclude that the poverty level has significantly risen during the black-out period spreading over four years after 2004.

The donor agencies, showing their oft-repeated lack of confidence in public sector, have decided to hand over the job of funds utilization to micro finance sector and NGOs. The leading and the most prominent micro finance market player, Khushhali Bank, boasts of having disbursed Rs.1.5 billion to 1.5 million households in 100 districts of the country. The disbursements include $150 million provided by the Asian Development Bank. With 0.3 million clients on its list, Khushhali Bank is said to be the 16th largest micro finance bank globally. The president of Pakistan Poverty Alleviation Fund (PPAF) disclosed having availed from the World Bank soft loans to the extent of $700 million. With the loaning agency having shown its satisfaction over PPAF's work, the president expects further such assistance in near future. According to the president of Khushhali Bank, poverty has been reduced to some extent. The PPAF president says that the income of micro borrowers has increased from 12 to 20 percent. In the absence of any government figures on the influence of micro finance on poverty alleviation, we are caught up in a state of limbo. Who will relieve us from this situation?

ARE WE CLEAR ABOUT OUR OBJECTIVE?

The pricing of micro finance is reported to be in the range of 20 to 25 per cent. If this is correct then we better call it Shylock-lending rather than micro finance. How on earth you can expect to help the poor under such an unjust pricing structure. Are we so devoid of sensibilities as to develop a system that is bound to increase the misery of those already in the grip of death - and that too from the money meant to be used for their well being? Our commercial banks are already busy in doing that. The micro finance sector will do well to leave the job of commercial banking to the commercial banks. The reason for what is happening is not difficult to trace. The huge paid up capital of Khushhali Bank has been contributed by countryÝs commercial banking sector. So if Khushhali Bank operates like a commercial bank, we have no reasons to feel disillusioned. Our micro finance sector is quite clear on its objective ˝ profit maximization.

The sector is still in the infancy stage; corrections can still be made. We do not need typical bankers to manage this delicate sector. Rather we need economists who are able to run the affairs with a human touch. They can take lead from the work of the Nobel peace prize winner Muhammad Yunus of Grameen Bank, Bangladesh, who believes and has proved that micro finance is a tool to fight poverty. His Struggling Members" (beggars") program is one of the most beautiful thoughts that can come to the human mind. Under this program, a member beggar is provided with an interest / collateral free meager sum of Rs.500/- to buy and carry with him such small items as sweets, toffees, toys etc. He is not exhorted to give up begging straightaway. Rather he is asked to do some selling besides his core business of begging. The process continues and at some stage, the member finds himself in a position to give up begging and shift to small scale vendor business. The selling for profit enables him to pay back the loan on time.

READ BETWEEN THE FIGURES

While bankers are trained to produce figures, economists can be relied upon to "read between the figures". A simple table containing meaningful data is reproduced below. Read between the figures and you will know what micro finance is all about.

GRAMEEN BANK, BANGLADESH (ESTABLISHED IN 1983)

 

2002

2003

2004

2005

Total Assets (Million Takas = MTs)

22,659

22,272

33,653

44,624

Number of offices

1,332

1,357

1,526

1,949

Number of branches

1,178

1,195

1,358

1,735

Number of employees

11,699

11,846

13,039

15,142

Number of loan officers

7,448

7,495

7,925

9,166

Number of members

2,480,000

3,120,000

4,060,000

5,580,000

% of women members

95.2

95.4

95.7

96.3

Number of active borrowers

2,080,000

2,870,000

3,700,000

5,050,000

Average loan balance per borrower (Takas)

6,134

5,622

5,444

5,563

Total loans o/s (MTs)

12,759

16,138

20,127

28,109

Current performing loans (MTs)

12,533

15,679

19,535

27,388

% of portfolio at risk

1.8

2.5

2.9

2.5

Return on equity (%)

2.93

10.63

8.98

21.22

Yield on gross portfolio (%)

18

18.5

18.9

19.2

Operating self sufficiency (%)

102

111

110

116

Financial self sufficiency (%)

99.6

108

106

110

Capital adequacy ratio (%)

9.2

19.3

16.5

13.4

Cost of funds (%)

5.2

6.2

7.2

7.4

Bank's summarized balance sheet as of November, 2007 is as follows:

(All amounts in million Takas)

Cash & Bank balances

936

Paid up capital

318

Investment

24,466

Reserves

5,551

Loans & Advances

37,546

Deposits & Funds

55,637

Fixed assets

1,115

Borrowings

1,793

Other assets

4,891

Other liabilities

5,654

Total assets

68,953

Total liabilities

68,953

The bank has grown keeping its capital and borrowings at a very low level with the result that the average cost of funds is as low as 7%. Add to this the nominal spread of 3 to 4 per cent and you will get the average lending rate. Now, how do you compare this rate of 11% to our rates of 20 to 25%? In the low "portfolio at risk" ratio of below 3% and women's 96% representation on the customer list, there are many lessons for those interested in the subject of micro finance.