MICROCREDIT Grassroots Capitalisom

Across Asia, the growing spread of microlending is helping poor people gain access to creadit for the first time. Its success in reducing poverty is cateching the attention of governments and businesses alike.

IT'S ABOUT AS FAR AWAY from the world of banking as you can imagine. Down a mud path, past the broken jeepney and right next to the fighting cocks, is an open-walled shack with a tin roof and a rough concrete floor. Inside, forty-four women ranging in age from 18 to their late 40s, stand in unison and collectively chant a series of sacred pledges to their local banker.

Welcome to the weekly meeting of Santa Cruz village centre #3, one of the local "branch" offices of CARD Bank, the Philippines' biggest microbank with some 38,890 customers and $4.7 million in loans outstanding. The women inside the shack are its core customers, the poorest of the poor, each earning only about 66 cents a day.

And yet, this is a banking success story. Thanks to the microloans--some as little as $60--many of these women have been able to lift their families out of abject poverty and cross the universal poverty line of $1 a day.

Make no mistake, the women of Santa Cruz remain poor by almost any measure. But they have been able to rise from the ranks of the deeply impoverished, an affliction that affects some 25 million Filipinos in a country with one of the most skewed income patterns in all of Asia. And in the past decade, microfinance has made the difference. The Philippines government and Filipino non-governmental organizations have put in place an extensive, but disparate network of microlending programs, with some 120,000 borrowers across the country.

"The Philippines is ahead of many, many other countries around the world in developing microfinance," says Muhammad, the founder of Grameen Bank in Bangladesh and the intellectual godfather of the movement. "Today the Philippines is at a stage where many other countries could come here and learn from it."

Now Philippine President Gloria Macapagal-Arroyo plans to make microfinance a cornerstone of her fight against poverty, lifting 2.5 million households--about 12 million people--out of poverty within three years. "Microfinance is a major component of the poverty-reduction program," says presidential spokesman Rigoberto Tiglao. Look for details of the plan possibly during Arroyo's state-of-the-nation address to the new Congress on July 23.

But the world of microlending today faces its own challenges. In the 25 years since Grameen Bank was founded, the bank and others like it have helped millions get on their feet and out of poverty. But considering that 1.2 billion people around the world live on less than $1 a day and 3 billion people live on less than $2 a day, microlending, for all its promise, has yet to make a real dent in global poverty.

The problem is scale. Can microlending programs grow big enough and fast enough to make a difference? Can they become profitable and self-sustaining? The problem lies in the complexities of finance, like cost of capital, bank regulation and fantastically high operating costs.

Ever since the 1997 global Microcredit Summit in Washington, microfinance has really come into its own. At that time, there were some 7 million borrowers and some 600 microfinance programs around the world. This year, the number of borrowers is expected to reach 20 million--with Grameen Bank alone accounting for 2.4 million--and the number of programs to top 1,000. The summit participants set a goal of 100 million borrowers worldwide by 2005.

In Asia, where most of the world's poor live, the number of microfinance programs has also grown dramatically, albeit on a very small scale. In Vietnam, there are some 57,000 borrowers compared with less than half that number at the beginning of 1997, while in Indonesia, the number of borrowers has increased to just under 9,000 from less than 1,500 five years ago.

In China, where some 60 million people live below the official poverty line of $74 a year, the number of borrowers has lept ten-fold in the past five years to 27,500 and the government has made microfinance a major component of its anti-poverty program. "There is quite an active microfinance sector in China, and there is clearly a need for banking the poor," says Georges Desvaux, a partner at McKinsey & Company in Beijing. "And microfinance is one of the tools the government has been using since 1993 to alleviate poverty. There is absolutely no question that the government will continue to encourage it."

But the trouble with microlending is that just getting more people to join isn't enough. To grow from, say, 50,000 borrowers to 500,000, the microlenders need to dramatically increase their capital. A normal bank would grow in one of three ways: by increasing the amount of deposits it holds, by dipping into profits or by raising money on the capital markets.

With loans of just $150 a piece on average and interest earnings of just a few cents a week, administrative costs can eat up as much as one third of the total value of the loan. In effect, microlenders are operating with a cost structure more closely related to private banking than general retail banking. So although the loans are profitable, the incremental profits are so small that it usually takes over 10 years for the microlender to grow to sufficient critical mass and break even.

Even then, the small capital base constrains growth. In East Malaysia's Sabah state, for example, the Yayasan Usaha Maju microfinance program grew too fast. Last year, the program lent out some $10.7 million in loans to 12,732 borrowers. But interest income on those loans was only $115,000 and operating costs were over $1.2 million. The program is now faced with cutting the number of branch offices by half.

Here is where governments can help. They can provide the capital needed for microfinance programs to scale up, through grants and donations to worthy programs, or, better yet, by acting as an intermediary between the NGOs on the one hand and capital markets or international lending institutions on the other. In fact, the Philippines is one of only a handful of governments worldwide to have taken the latter approach. In 1995, the Ramos administration set up the People's Credit and Finance Corporation, which acts as a commercial wholesale lender to microfinance programs.

The fund administers $34.7 million in loans from the Asian Development Bank and the International Fund for Agricultural Development, an agency of the United Nations. The funds are lent on to microfinance programs with the Philippine government acting as a guarantor. Eventually, the government plans to privatize the PCFC, which would remove some of the political interference that has affected its lending in the past.

Teresita Quintos Velez, lead conveynor of the National Anti-Poverty Commission says there is more work to be done, however. "One of the things we are doing is mapping and locating all the microfinance funds in government so that they may be consolidated in some way," Velez says. "There has never been any attempt to set policy directions for microfinance, but that is what we are attempting to do now."

A second area where government can help is in regulation. The central bank can allow microfinance institutions to accept deposits, in effect, to become microbanks. For instance, Bangko Sentral ng Pilipinas has already allowed that to happen in select cases--CARD Bank is one example; other microlenders are applying now.

Commercial banks also have a role to play. One promising area is in loan securitisation. With repayment rates of 98% or higher, many of the loans held by microfinance programs could be packaged as bonds and sold to investors. In India, Citibank is looking at ways to securities a loan made to SPARC, a microfinance group that is working with Bombay's Slum Dwellers Association to build new housing in the city's giant Dharavi slum.

But there's also a human cost to scaling up. For one thing, how many of the NGOs that now run microlending programs have the skills and mindset to become giant lending institutions? After all, for many of the good Samaritans that help make the programs tick, the job is a tough one--hours are long, pay is low and loan officers have been robbed or even killed for the money they carry between meetings (including one in Santa Cruz village). It's no surprise that many leave after just two years.

But then, banking for the poor can have its own long-term rewards. Like for Rodel Barrera, an ASHI field credit officer, who spends his days in the plywood shacks of Muntinlupa, a Manila shantytown built alongside the city's railroad tracks. His mother got her break from a microfinance program years ago--and used the profits from her small business to send Barrera to college at Laguna State Polytechnic, where he received a degree in agricultural science. He says gratefully: "I'll do this for as long as they want me."

Microfinance is a way to give something back to local communities. In the Philippines, tax breaks have encouraged banks to set up charities focusing on microfinance. Citibank, the largest contributor to microfinance, has been extending loans and grants from Latin America to Asia for the past 15 years. Says Frits Seegers, Asia-Pacific chief of consumer banking at Citibank: "Microfinance fits with our corporate philosophy of helping people help themselves."

By Alkman Granitas and Deidre Sheehan. The Far Eastern Economic Review,
July 12, 2001.

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