SME and Microcredit

I’m delighted that we can all assemble here with such a big attendance. I was not expecting such a big conference on SMEs. I thought it was going to be more of an internal sort of discussion. I am particularly delighted to see such a big representation from the microcredit group. Since it is addressed to them I think this will be a good gathering to reflect where we are and where we want to go.

First thing I would like to mention that IFC/SEDF has brought this issue up for discussion at a very appropriate time. This issue has to be addressed sooner or later. I also thank them for choosing Bangladesh as the venue for the event. This conference could have been held anywhere in the world. A good reason why I think that it should take place in Bangladesh is not only because Bangladesh is the birthplace of microcredit but also because this is where microcredit is done in the most intensive way than anywhere else in the world. The issues for the future are emerging here, right now, because of the intensity and density of microcredit in Bangladesh than it is happening in any other country in the world.

Another reason why we should be looking at the microcredit situation in Bangladesh is because it is not only the birthplace of microcredit, but also because Bangladesh has changed the banking world forever. I don’t think banks can forget microcredit and go on with their old style business. Banks have to rethink, redesign and reposition themselves for the question raised by Bangladeshi microcredit. So it can not be really business as usual for them any more. They have to answer a lot of difficult questions. So this is the place where the exercise can begin because of the long experience, outreach, and diversity of microcredit in this country.

Sometimes we hear through the press some negative remarks made about microcredit, but that is part of life. But today in this occasion I propose a big applause for all the thousands and thousands of young people who are working very hard to make new banking come true, and going through the pains to make it as perfect as one can make. I propose a warm applause for all the microcredit workers all over the country.

The bankers were telling us that the poor are not credit-worthy. But now we have changed that. We are telling them that you are absolutely wrong. We insist that the question should be raised the other way around. The real question should be whether the banks are people-worthy. That is the real issue. I think the answer is obvious. They are not.

Two third of the world population remain ineligible for bank credit. So what kind of banking structure have we built? If that structure cannot serve all people, you need to go back to the drawing board and find out a way to make it all-inclusive where anybody can come in and do business with that structure. So this issue will come back again here today during the course of this conference. Again the question to be asked : Are the bankers people-worthy ?

We were told that the conventional banks are watching us closely. But those conventional banks should be told that we are watching them too ! Are you behaving right? It’s not watching in one way direction. We’ll be watching you to make sure you behave and serve the people. That is the real issue to be discussed during this conference.

The subject of this conference is SME. Question naturally comes, which kind of banking are you talking about for SMEs? Is it the kind of banking that doesn’t require collateral or you'll be talking in terms of banking with collateral ? If you are going to talk in terms of collateral, sorry you cannot deal with us. Because people are not eager for your old style business. That has to be resolved first, i.e. SME with or without collateral.

Is SME designed for illiterate people? If you can’t do SME with illiterate people, then we don’t have a business here. Because we in microcredit work with illiterate people. You may have business elsewhere but not with us. You need to know how to do business with illiterate people. Now, which SME you have in mind, is it SME for men or SME for women. That is to be resolved too. How do we address these issues?

All these issues need to be addressed so that we can go into the microcredit area. There is a wide gap between credit for the poor and for the rich. Banking that exists is the banking for the rich. Poor people have no room there.

Mr. Governor has mentioned about the summit goal of reaching 100 million poorest families by the year 2005, and this is 2005. We are celebrating the international year of microcredit and we are proudly announcing that we have reached those 100 million poorest families as we promised in 1997.

But the question is- where are those 100 million poorest families located? Out of these 100 million, 85 million are in Asia and the rest 15 million are in Africa and Latin America. Asia has become the hub of microcredit, Bangladesh has reached some where around 17 million families.

Try to imagine what would be the meaning of 17 million families being reached with microcredit and doing business with them in everyday way. With a billion plus population, for India this would mean 170 million families, i.e. if India had achieved the same intensity as in Bangladesh, they would have 170 million families reached with microcredit. But what’s the real situation in India? It’s hardly 17 million at most. India is way behind. There is plenty of room in India for microcredit to grow, develop and flourish.

Next issue that is usually raised is : where is the money coming from? Who is providing the money for all this? We have been arguing over and over again that the money issue is not an issue; it’s a non issue, because it is available right there where we work. We made our legal system in such a way that MFIs cannot pick that money up and lend it to people. Because of the non existence of appropriate law, NGOs are running around for money to carry on their jobs.

The solution is very simple. Solution is to create a law enabling the MFIs to convert themselves to microfinance banks. If they become microfinance banks they'll take deposits from the same locality where they work. So the question of finding money from the donors disappears right away. Microcredit should be working with the local money, to give it to the local poor and build the local economy, unlike conventional banks which mop up the local money and funnel them into big cities denying the money to be utilised locally. That is what our traditional banks have been doing. They invest very little in localities where they work.

Microcredit works in a very different way. It can mobilize deposits and use it right there for poor people of the locality. It’s a win-win situation for everybody. People who have money to save, they can save. People who need money to invest, they can borrow. Poor people can borrow and create self-employment. The local economy gets rejuvenated.

We have been misdirected while we were searching for funds. If MFIs are allowed by law to convert themselves into banks they would not have to look for money outside. Along with the creation of that law we need another law, law for creating a Microcredit Regulatory Authority. When you create banks, you need a regulatory authority, to oversee them, whether they are doing things in the right way. It is important because dealing with public money is a very risky business.

This is a new kind of banking we are talking about. We have argued very passionately and convincingly in Bangladesh, that a central bank doesn’t have the capacity or the expertise to regulate microcredit banks. We argued to create a separate regulatory body. In Bangladesh microcredit is a significant sub-sector of the financial sector. It should be taken seriously.

I’m happy to say that the government has responded to it positively, the Central Bank has responded to it positively, everybody responded to it positively. We have drafted both the laws, the law for creating “Microfinance Banks” and the draft for the law for a “Regulatory Authority”. We are still waiting for it to be enacted by the Parliament. If these two laws get enacted by the parliament these Microfinance Banks can start functioning to fill all the gaps that we see existing in the financial picture.

We usually find a funny financial structure. We find financial services on the top of the structure, then the rest is empty. That’s where money-lenders step in to fill the empty space. We want to complete the financial structure. We are talking about SMEs; to me more important than SMEs is agricultural credit, which really doesn’t exist. This too is a funny situation; we have agricultural banks that do not run as proper banks. We need genuine agricultural banks. If we create the legal framework we can move into filling up these existing gaps in the new structure.

So my question is- are we approaching this filling the gap question with a traditional approach by extending the philosophy and technology of the old, or we are talking about building a new structure from the bottom up? This is the issue we have to resolve in the coming discussions. My fear is that if we approach this from the old banking perspective, we would be going back to square one. But the structure is not suitable for common people and we need to change that. In trying to resolve this issue with a new approach we may make mistakes along the way. But today the chances of making those mistakes are less, since microcredit is so efficiently established in this country. We have a better chance in moving with a new approach.

The most comforting issue is that all human beings are endowed with enormous energy. The unfortunate part of the story is that very few get a chance to unleash that energy due to the failure of the banking structure. Microcredit has shown that if you give a little money, they can explore themselves.

A woman who had nothing, if given a loan of Tk. 3,000 could buy some paddy from the market, husk it at home and sell the rice and earn her own living. If she is given more money, perhaps she can buy herself a cow, sell the milk and pay the bank back and move on with her life. They have the energy, but the money was not available. Today through microcredit, the money is available; people are taking care of themselves by moving out of poverty. They are sending their children to school and that’s why Grameen Bank had to come up with student loans.

In Grameen Bank, not only we lend money to 5.5 million borrowers, we focus on their children. We want to make sure that they are sent to school. This is not a job that the conventional banks will think of, but we do it as a social business institution owned by the borrowers. Many of their children are now getting their medical, engineering and other professional degrees. Grameen Bank gave them student loans. As a result, a new second generation is emerging out of these families. We give housing loans so that they can build themselves houses. We give interest free loans to beggars so that they can start up their own door to door businesses rather than door to door begging. They need tiny loans, as small as $ 10. Even a beggar has that wonderful gift of creativity, and ingenuity. Only thing we need to do is to recognise them.

We need an appropriate financial system to match with the enormous potentials of all human beings, not a system to support only few selected people. All human beings are entrepreneurs. If you don’t know how to do business with all people, you'll have to learn, you cannot just give up. You cannot just say it cannot be done. It is against universal human spirit to say "it cannot be done". It can be done! It has to be done! And that’s what Bangladesh has done. It has shown the way. Bangladesh is the learning ground for the world. Our young people who made it happen make us proud. They have made the whole world look at Bangladesh with hope for creating a new financial structure.