Even well-managed, profitable micro-finance institutions (MFIs) find their growth constrained by lack of capital, without which they are unable to leverage from banks the large amounts of funds required for on-lending to the poor. CASHPOR Financial & Technical Service (CFTS) in Uttar Pradesh, India, is working with ICICI Bank, a local commercial bank, in a potential breakthrough collaboration which could significantly reduce this constraint.
Microcredit is a business, but it is a business with an overriding social concern: the reduction of poverty. Businesses need capital to grow. But private investors are not keen to invest in microcredit; they don’t yet see it as potentially profitable, hence the capital constraint in the industry. The capital constraint is going to prevent many non-governmental MFIs from establishing sustainable formal financial institutions and it is going to prevent those that are formed from, making a significant impact on poverty in Asia.
This is why the collaboration with ICICI Bank could prove to be so important. A new company has been registered-CASHPOR Micro Credit (CMC)-that is collaborating with ICICI Bank in Chandauli District, eastern Uttar Pradesh, with the dual objectives of breaking-even financially within four years and providing nearly 50,000 households below the poverty line with micro-finance services. CFTS will provide the social intermediation, assist with the financial intermediation and charge an upfront administrative fee of 5%. ICICI Bank will provide the loan funds and take the risk on the loans. A memorandum of understanding for the initial four-year collaboration has been signed and work commenced in April 2003. CMC, which is an adaptation of the CASHPOR fast-track approach that was developed in Mirzapur, is expected to be fully-staffed and operational by the end of June 2003.
Joint collaborations like this one, may be the answer to reducing the capital constraint. If instead of trying to establish their own formal financial institutions or transforming themselves into such an institution, non-governmental MFIs can collaborate with banks to provide micro-finance to large numbers of poor households, then significant poverty reduction could be achieved. The collaboration being proposed above between NGOs and banks would be an ongoing one, with the NGOs aggregating loan proposals, delivering them to the nearest branch of the bank, receiving a single check from the bank and breaking it into small checks to be disbursed to members of the village groups.
Such collaboration eliminates capital requirements for leveraging on-lending funds because they are provided by the collaborating bank. Also they reduce working capital needs, as no loan loss provision needs to be made by the MFI. Significant reduction of the capital constraint to growth in the micro-finance industry should make possible the provision of micro finance services to many more poor women throughout Asia.
For more information on CASHPOR, please see the CASHPOR web-site at www.cashpor.com or contact David Gibbons at [email protected] . For more information on GF-USA’s work in India, please contact Julie Stahl at [email protected] or 202-628-3560 ext. 104.
