Sustainability and Governance of Microfinance

Institutions: Recent Experiences and Some

Lessons for Southeast Asia

PGP/26/063 Abhishek Walter Paul

PGP/26/087 Lalit
PGP/26/105 Shaksham Raj
PGP/26/112 Sourav Anand
PGP/26/114 Tanishaa Nadkar
PGP/26/409 Shaan Kotwani
Trends in South East Asia
Until the 1970s, formal public institutions provided loans at subsidized rates to small farmers- high risk loans and
institutional weaknesses
1980-1996 saw the emergence of semi-formal Microfinance Institutions targeting women entrepreneurs with
innovative lending approaches as well as skill-based training, consciousness building and political participation

Cooperatives provide
Private sector
microfinance through
NGO's provide Self Help Groups institutions provide
collective pooling of
microloans to follow the model of microfinance through
resources and offering
Governments support households, each lending their intermediaries, where
financial services,
MFIs by providing country is usually members' savings, loan appraisal,
including credit and
subsidy for operations dominated by few and are supported by processing and
savings, to support
and guaranteeing NGOs- less than 20% external sources. The management tasks are
members'
loans of NGOs account for model combines undertaken by NGOs,
entrepreneurial
more than 80% of microfinance with MFIs or brokers, the
activities and
loans health and education loan is given directly to
economic
the borrowers.
development.

1,652 MFIs 96.7 million clients 77% poorest families 86% women clients
 Diversity in Microfinance in South East Asia
Malaysia -
Higher per capita income and lower poverty rates
Amanah Ikhtiar Malaysia is an NGO with political backing,
that disburses small loans at reasonable rates but focuses
on the Bumipetra (indigenous population).
Thailand -
Market segmentation based on target population;
Commercial banks serve agroindustries and large
farmers
Government programs and NGOs serve poor and
landless
Bank of Agriculture and Agricultural Cooperatives
(BAAC) serves smaller farmers. It has shifted from short
term agricultural loans to longer term lending for non-
agricultural enterprises. It reached a deposit-to-loan
ratio of 100% within 10 years of accepting deposits.
More than 90% of farm households are BAAC clients.
Indonesia -
Regulated finance institutions dominate the sector
Bank Rakyat Indonesia uses a unit-desa system and
individual lending that allows it to dominate rural-level
lending and improve credit operations on a grassroots level.
It requires individuals to put up collateral and is completely
self-sustaining.
Bangladesh -
Dominated by NGOs, more than 1000 NGOs serve more than 10
million households
3 NGOs account for 73% of total outstanding loans
The Grameen Bank follows group lending and has a repayment rate
of 98%- 97% of the 7.5 mn borrowers are women
Philippines is attempting to replicate this model but has been
unsuccessful so far, NGOs are too reliant on grants to sustain
Cambodia -
MFIs were set up with the help of international NGOs
The Government has set up the Rural Development Bank to act as a
wholesaler for MFIs and developed policy and regulatory
frameworks for MFIs
Vietnam -
MFIs depend on government support and NGOs on donor grants
Government set up Vietnam Bank for Agriclutural and Rural
Development (VBARD) and Vietnam Poor Bank (VPB) for
specialized lending
Laos -
Least developed MF sector in SE Asia- 15% coverage in 1966
Laos Women's Union has 650,000 members- 50% of adult female
population. It has established 1,650 Lao Credit Associations to focus
on income generation and credit access for the poor and women.
Sustainability of the Grameen Bank Model

Origin Profitable Outreach

Set up in the mid-1980s in Bangladesh to Profits depended on direct grants, implicit Plans to expand by reaching 12 million
lend exclusively to groups of poor households, subsidies and delayed loan loss provisions borrowers by 2010 using its own
with group formation being voluntary and all in 1995-96, but a recent paper claims it is deposits, mobilized from its members
members being responsible for repayment. now self-sufficient. and the public
 Sustainability and Outreach of the Grameen Bank Approach
The Rural Micro-Enterprise Finance Project (RMFP) in the Philippines

Replicated the GBA model in Philippines with the support of the Government and aimed at:

Poverty reduction
Creation of employment opportunities
Enhancement of rural incomes of the bottom 30% of the rural population

It supported two components:

An MFI-support component comprising the establishment and strengthening of Grameen replicators

On-lending to final borrowers through NGOs, cooperatives, and local banks

The approach was adopted by many rural banks with several modifications including product diversity, variability in interest rates
and loan terms, group size and rules of loan release and meeting cycle.
Some important takeaways include:

GBA can be highly profitable owing to high repayment of women and high interest rates
Outreach can be increased by stronger support to branching-out through institutional loans
Restriction of loans to productive purposes and micro-enterprises interferes with institutional autonomy
GBA as a group lending methodology is flexible
Institutional sustainability and rapid increase in outreach to the poor can be mutually-reinforcing
Commercial approach: Rural banks and NGO-turned-rural banks played a crucial role
Sustainability of the SHG Bank Linkage Model
Development
The SHG model was developed by NGOs in India and
promoted by both MFIs and banks. They have around 20
members each and are based on lending members’
savings. They also seek external funding to supplement
their resources.
Concerns
Lack of clarity over the main responsibility of
promoting and maintaining groups to ensure quality
meeting the costs of doing so.
Financial sustainability of the SHG Bank Linkage:
Interest rates of 12%-12.5% are much below the all-
inclusive costs of lending between 15% and 28%.
Expansion
The number of SHGs linked to banks has increased
dramatically from just 500 in the early 1990s to over
800,000 by 2004. The National Bank of Agriculture and
Rural Development (NABARD) is the main promoter of SHGs
in India, working to establish more groups in the country.
Proper targeting of clients, first, by clearly determining
who are being targeted and defining eligibility rules.
Support from the government, NGO and rural banks has
been helpful, but increasing outreach and ensuring
financial sustainability may need the involvement of
private sector banks.
 Determinants of Sustainability of MFIs :
Institutional Innovations-
It played an important role in enhancing the sustainability and outreach of MFIs in different countries
Examples include the BRI Unit desa in Indonesia, the Palli Karma Sahayak Foundation (PKSF) in Bangladesh, and SHG federations in India.
Challenges to overcome, such as the inadequate capacity of promoter agencies and the lack of legal frameworks

Strong Commitment & Political support for Change-

In Indonesia, the top management of BRI protected the Units from political interference and led the development of a new institutional
culture that was associated with the shift from subsidized farm credit to commercial micro-banking
In Bangladesh, the vision and commitment of the leaders of the NGO/MFI movement were instrumental in ensuring the success of the
microfinance sector. At the initial stages, leadership skills played a key role in convincing the public that providing credit to the poor was a
viable option.

Learning and Experimentation -

In Indonesia, BRI learned from the experience of others before setting up its own microfinance system. It studied the experience of Bank
Dagang Bali, a private bank, and the Badan Kredit Kecamatan (BKK), a community-based institution. It also learned from informal
moneylenders on how to collect information on prospective borrowers.
In Bangladesh, both the informal feedback by field staff during regular interactions with management, and the formal monitoring and
evaluation contribute to this learning process

New Products Appropriate for the Poor -

In Indonesia, Bank Rakyat Indonesia (BRI) turned 3,624 village units (unit desas) into full-service rural banks in 1984 & introduced a new
loan product called KUPEDES,whose interest rates were fixed at 1.5% per month or an annual effective rate of 33%.
Determinants of Sustainability of MFIs :
Long-Term Banking Relationship -
In contrast to the massive defaults of large and corporate customers in the Indonesian banking sector, KUPEDES borrowers
continued to repay their loans despite economic hardships.
It was because of the long-term banking relationship that had developed between the Units and the borrowers

Procedural Simplification -
In 1983, BRI made drastic changes to the accounting systems and staff incentives for its village-level offices, the Unit desas &
became individual profit centers, with full accountability for their performance and an incentive structure to reward staff
achievement
Aslo investmeneds in human resource development creating a motivated workforce, which contributed to the profitability of the
system

Enabling Macroeconomic Environment -

A stable macroeconomic environment, particularly with respect to interest rates and inflation, is a prerequisite for the growth of
microfinance
Flexibility to determine interest rates is an important factor for sustainable microfinance
Reforming a Government Bank to Reach the Poor
The BRI experience has provided one major lesson that a state-owned bank can be reformed and existing infrastructure and
human resources can be utilized to implement a sustainable approach of large-scale microfinance within a short period of time
However, this required a change of culture, which treated the poor not as beneficiaries but as customers who can save, who are
able and willing to pay market prices for goods and services
Questions What are some of the concerns associated
with SHGs in India?

What are the design features of

successful MFIs?

Name two important benchmarks to

measure the success of MFIs