Financing Micro

Financing Micro-finance for Poverty Reduction David S. Gibbons, Managing Director, CASHPOR Financial & Technical Services, Malaysia

Thank you, Mr. Chairman. Good morning, ladies and gentlemen and distinguished panelists. I should say right at the beginning that I am not going to speak on papers that has been distributed. It is two years old and things have moved on. Just one example, the approach that we suggest for our paper for financing. Micro-finance is no longer possible really in India, because the Indian government in its wisdom has called external commercial borrowing to all financial institutions including micro-finance institutions. For it is no longer possible for a micro-finance institution to bring in soft loans or to help it to finances required to breakeven. So that’s a bad news. But the good news is when we discovered a better way to finance micro-finance causing in Indian context, then I think, it has general value for micro-finance around the world. So that is what I would like to speak here and I am sorry for my panelists being caught off-guard. But I am sure they will be able adjust. Now the problem remains the same. The problem is the capital constraints. Capital constraint remains the main obstacle to MFI outreach to the poor. The obstacle to increase our outreach significantly is capital constraints. I don’t say that’s the only obstacle, but to all practitioners anyway it’s the main obstacle. Except of course in Bangladesh where we have PKSF. The PKSF indicates what could be done in other countries of the world, if the government is serious about micro-finance and poverty reduction. Elsewhere,however, we have some optimum growth-rates among virtually all micro-financing situations. That is to say they are growing, their outreaches growing much less than it could. Actually they were adequately financed. No other poor country has a PKSF yet. Governments and central banks are dealing and even counter attacking as we have seen in the last couple of days. However, aggressive banks, both domestic and international, are seeing opportunity in micro-finance in a major way for the first time and that gives us some hope. So we have come up with what we call MFI bank which it cognizant and these affairs could be an important way and help. It’s based on the division of labor between MFIs and banks, and specialization according to the comparative advantage. So this is a simple idea, financial intermediation as done by the banks and social intermediation as done by the MFIs. They may also assist the banks with financial intermediation. So this new approach .has been written up by the bank that we are working with firmly in India, ICIC Bank and I have given you the reference to this paper. It amounts to a win-win situation. The banks get profit and they can also priority sectors. MFIs have become financially sustainable and what is not on the screen- the most important thing that poverty can be reduced. So the poor can benefit. The MFIs can become financially sustainable and the banks can get profits. The benefits of this strategic partnership which minimize the MFIs capital constraints because the MF funds are being provided by the bank. So the MFI no longer needs to build capital to leave it without funds from the bank. The only capital we need is to finance its deficits prior to breaking. Also their partnership maximizes institutional efficiency because the MFIs and the banks are working according to their comparative advantage. It should result in a smooth flow of onlanding funds accordingf to business plans, targets and needs. Now this is a dream for most MFIs.

/var/www/apps/pdfcoke/pdfcoke/tmp/scratch5/16914093.doc

A smooth flow of an adequate amount of funds is a dream.. If we can bring in about this, then they can go an optimum of breakeven and many many more poor can also be reached. Another advantage, there are no legal regulatory hurdles to this partnership. Of course, there have been some problems, interesting problems. Though they have been cooperating in servicing but bank delays to transfer fund, delay in ensuring cheque books, delay in cashing a cheque in a particular optimal cases and in some cases they say ‘come back tomorrow’. This kind of things acceptance of deposits. Because we have developed credit policy on the field staff. So that collection that are depositd by the center officials in the cental meeting. But it may be possible to get better cooperation from the servicing banks through cash management agreement. ICIC is currently negotiating cash management agreement with the main servicing banks. That means they will get something in return for handling the cash. Another interesting problem, who pays the pipe-line interest. Pipe-line interest arises because of lack of cooperation from the servicing banks. The funds take a long time to get from district level down to sub-district level. It can take from 3 weeks to 4 weeks for funds to reach the rural branch. My own feeling is that we need some technological solution to this, perhaps through a simplified rural ATM and perhaps through internet banking. So what are the results, we want to obscure the partnership. We are negotiating and expanding it to two more districts. ICIC is considering to provide it to eliminate cash flow remaining constraint. We still have to finance our deficit by breakeven in each district. ICIC is considering giving soft loans for that purpose. The bank has also offered to lower the interest rate to clients from 12.5% and the bank charges its clients directly to 8.25% in return for 10% first loss of guarantee. So we take responsibility for any losses. Thank you very much. Chairperson: Thank you very much. You addressed a very very important point in relation to Commercial Banks and Micro-finance and it is true that we are in a moment where Commercial Bank has been privatized certainly. They should find reason for being interested in looking at the nonbanking capacity of a world and off-course here is quite difference in different countries from all over world. Can I ask Mrs. Uy for your comments within eight minutes.

/var/www/apps/pdfcoke/pdfcoke/tmp/scratch5/16914093.doc