Saturday, April 2, 2011

New Generation Microfinance –Financial Inclusion beyond microloans

Microfinance has become a big phenomenon in developing countries in last decade. Private Equity and Venture Capital investors recently made a lot of money in the SKS Microfinance IPO in India. But after that SKS and other Microfinance organizations were in the center of the controversy for charging very high interests to the poor (political parties alleged they are behaving like loan sharks and poor people are committing suicide for their harassment). In Bangladesh Muhammad Yunus and Grameen Bank (which have a different Business philosophy from SKS and other Indian counterparts – they don’t believe in Capital Market participation and for-profit role of microfinance) was also part of different controversies including charges of corruption. In this article I will propose some solutions beyond microloans and how that can benefit poor and at the same time be a profitable business (win-win case).

I believe present form of Microfinance Business practice is not sustainable. A poor with no business experience can not take a loan with 24% Interest and still make money. This must go down a lot. The only way you can do this is by taking Banking License and getting cheaper Deposits from the poor. This is also beneficial for the poor as they will create a habit for saving money. My thought: take deposit @5% rate and provide loans @15% max.

Micro Finance Institutions (MFIs) should create Credit rating program to assess the risk (both individual credit risk as well as systemic risk). A person having multiple loans and not using the fund for Asset generating purpose should not be given new loans. We need to consider Loan/Income ratio (Responsible lending), usage of loans and other responsible lending practices. Lending growth without considering the quality of growth can be catastrophic (similar to subprime crisis)

MFIs need to create new Business opportunities such as Micro mutual funds - Few people venture to start their own business, but they can invest some money in Stock market and create wealth. MFIs should start their own asset management business (low cost Index funds) for the poor. After MF Entry load was abolished no MF distributor wants to sell Mutual Products (MF) to the rural or urban poor. There has been a major gap to tap this market. Capital market penetration in India is still very poor. MFIs can leverage their existing relationship and infrastructure to service this market.

MFI Network can be leveraged for selling Bottom of the pyramid plays such as alliance marketing revenues for related products for the poor (which really helps them, not just for making money). Informing the Indian poor (having no access to Internet) about New Product/Services can be an win-win proposition for the Product/Services vendors, Poor consumers as well as the MFIs.


Anonymous said...

I don't think that the idea of providing index fund investment opportunities to the poor will be beneficial. Besides being less informed in general than higher income people about the risks of the stock market, they will be much less able to take losses that are nearly inevitable at some point in time with investing.

If the market turns down when they need to pay for medical care or educational expenses, it will make their situation harder than it already is. It is far better to focus on secure deposit products--particularly if they are insured against loss by the government like bank accounts are in many countries. This will provide an opportunity for them to save money and earn a return on it.

Anonymous said...