Introduction
The
microfinance industry is one of the fasters growing industry in most developing
countries or economies. The industry was
just one the few sectors within most economies that did not experience the
ripple effect of the well known credit crunch that squeezed out a lot of huge
banks and insurance firms. When most
major banks were experiencing huge losses as a result of bad or delinquent
loans most microfinance banks were still
making loans and were recording profits as a results of healthy loans ; thereby
providing their shareholder’s value for
their investments.
It
is also on record that whiles most traditional banks across the world suffered during
the economic down turn, most Microfinance Institutions (MFIs) were insulated
from the negative effect of the credit crunch since there was a good spread of
the loans made by MFIs which at least reduced the covariant risk that is high
with most traditional banks. For
instance there are evidences to support
the fact that whiles two thirds of the banking system collapsed during the
financial crisis of 1999 in Ecuador, MFIs and cooperatives grew at a fast pace and maintained a high levels of portfolio quality.
Today
the microfinance industry has proven a point that the poor can save and the
poor can use credit to better their lives. These and other successful achievements
has attracted private entities to consider providing services to the poor and
the low income earners. It is not surprising today to see multinational and local
traditional banks venturing into microfinance either directly or through
creating partnerships with already established MFIs. At least for now the
impression that the poor can not be the
source of a bank’s profit has been defeated and most endowed financial
institutions or individuals are reviewing their notes about doing business with
the poor. This explains why some commercial microfinance banks and finance
companies are attracting great interest amongst investors. A clear case is the
successful public offerings by Compartamos Bank in Mexico and Equity Bank in
Kenya, all microfinance banks.
One of the striking features of MFIs is that they are financial
entities with double bottom line, that is to say that, every penny of services
provided by an MFIs is intended to
impact socially on a client’s livelihood
aside the MFIs making some profits to support its operations. This is
what is missing in the operations of most traditional banks. This is not to say
that the traditional banks do not consider programmes and projects that will socially
benefit its clients. Currently almost all the traditional banks have adopted a
concept of corporate social responsibility (CSR) as a core part of their
operations. However, MFIs over the years have sought to include social
responsibility as an integral component
of its operation alongside achieving
financial returns for their investment. This seems to explain why most socially
responsible investors (SRI) have been attracted to MFIs and not to the traditional banks when it comes to
channeling funds to the poor and the low
income earners.
Why commercial funds?
Demand
for microcredit is growing across the continent and particularly in Ghana. This
development is making most MFIs to consider other sources of funds other than
subsidies and deposits in order to enable them to meet the high demands being
made by productive clients who are determined to improve on their livelihood by
the judicious use of the credit and training they received from the MFIs.
MFIs
depending on their typology; that is whether it is an NGO (with only social impart ),MFI with double bottom line and Cooperatives( Credit Unions as in Ghana and Savings
and Credit Cooperatives (SACCOs) as in
Central and Eastern Africa) This type of MFI is mainly membership based. These MFIs have depended on several source of income to
finance their loan portfolio and other operational cost.
Financial
NGOs which are mainly for the purpose of reducing poverty, women empowerment,
etc, has in time past mainly depended on donor and governmental assistance
in the form grants and subsidies to
finance their operations. Most of them operate sorely on grants and their main
aim includes helping governments and international donors to achieve their
objectives of helping to improve the livelihood of the poor and the low income
earners.
MFI’s
with double bottom line that is for profit and social impact have financed their loans from deposits
mobilization, (that is for the regulated MFIs) donor assistance in the form of
subsidies and borrowing. Credit Unions or Cooperatives mainly depend on saving
mobilized from members and loans are strictly given out to members.
Although
most MFIs irrespective of it typology, have benefited from donor assisted funds
(grants and subsidies), these source of funds have declined over the past ten
years and is expected to decline further with the onset of the world economic
crisis. The reasons for the reduction in donor funds
for microfinance apart from the world economic crisis can be attributable to
several factors which include donor fatigue, commercialization of most MFIs and
the transformation of most financial NGOs into profitable MFIs. Another point about donor funds is that it comes with
restrictions as well as guidelines which may not be suitable for MFIs with double
bottom line objectives . MFIs that sorely
depended on donor funds had in the long run “burnt their fingers”
especially when donors exit without any
prior arrangement to make such MFIs
continue with their operations.
Donor
assistance or support cannot be overemphasized in providing financial
assistance to the poor. However, there is a new trend as to how donors are
providing these assistances. Most donors
involved in enhancing the development
of MFIs now approve funds to support the capacity building of MFIs to
make them more effective and efficient rather than providing funds or subsidized
credit to on lend to its clients. With the decrease of grants or funds from
donor organizations across Africa, more MFIs are now turning to commercial borrowings to support their operations and make them more
sustainable.
The
need for external or commercial funding for MFIs is
making more MFIs to become very efficient and very sustainable as compared to
the era of grants and subsidies .Subsidies have formed an integral part of
microfinance in its early stages of development and its contribution to the
development of the whole sector cannot be overemphasized. However in recent
times some MFIs have started decreasing the number and amount of subsides they
take to ensure operational efficiency and less interference from donors. These MFIs are reducing their over dependency on
donor assistance to ensure their survival in the event of donor fatigue and the
world economic crisis. This is the surest way to ensure that MFIs acquire funds
to continue with their operations which mainly involves the granting of
microcredit.
Importance of commercial funding:
Providers
of commercial funding put significant emphasis on assessment, ratings, standardization
of financial ratios reviews and comparisons which are geared towards a
sustainable and viable sector. This is to say that MFIs wishing to borrower
from any microfinance investment fund is at least required to show good
governance and transparency in its operations. This statement is further explained
by Clark, as he indicates that “MFI willing to access commercial funding
should posse the following”:
- Should
have perfected their service delivery methods and product design to
respond to the demands of their market in a rapid and efficient way, ensuring
an increased volume of operation and repeat borrowing
- The
MFI should have a strong sense of mission and a sound governing structure
that is free from political interference, so that they can make policy decisions that protect their
financial health
- Should
have a management team that focuses on efficient service delivery and
productivity, on profits rather than volumes, and sets productivity goals
and incentive schemes
- Have
information systems that produce clear, accurate, timely and relevant
information for management decision making and that is focused in well-developed loan tracking and
financial reporting systems, reporting on cost and income
- Maintain
a low level of delinquency(that is below 5 percent to 8 percent outstanding portfolio ) to
ensure optimum income and prevent asset erosion.
- Have
a record of achieving high levels of financial performance or incorporating
appropriate pricing policies based on the full cost of delivering their
services.
The
list as outlined by Clark seems to be the very challenges pertaining in the
microfinance industry. These characteristics
for assessing commercial funds are therefore indirect initiatives aimed
at standardizing the reporting format of most MFIs in order to contribute to
greater transparency which is currently missing in the industry.
Conclusion
Commercial investment for
microfinance is on the rise. Several traditional banks and individual investors in Ghana are financing some MFIs to enable
them to improve on their outreach. These
investments or source of fund can help MFIs to grow and develop to realize
their potential to become full-fledge domestic financial intermediaries to
improve financial access to the poor or the low income earners over a long
sustainable period of time. According to CGAP(Consultative Group to Assist the
Poor) the future of microfinance lies
with sustainable financial institutions that mobilizes public deposits and tap
domestic banks and capital markets to finance their expansion and serve the
poor or the low income earners over the long term. MFIs in Ghana should,
therefore, position themselves by improving on their basic operations system to
enable them to take on commercial funds to support their operations in the wake
of the decline in donor funding for on-lending activities.
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