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Small is beautiful


PAAVAN MATHEMA


Twenty-seven-year-old Kamala Pariyar of Lamatar owns a tailor's shop with three sewing machines and a cupboard of cloth for her clients to choose from. Until six years ago, Pariyar would spend her time looking for sewing jobs at other tailors' businesses. With help from DEPROSC, a microfinance institution, she has started out on her own.

"I started with a loan of Rs 10,000," says Pariyar. "Now the earnings from my shop are enough for my household expenditures, my child's school fees, and I have savings as well. I am much happier."

Pariyar is one of the 1.7 million Nepalis who have benefited from the unique concept of microfinance. Known popularly as 'banking for the poor', the core idea behind microfinance is the provision of collateral-free, small loans that aim to reduce poverty among borrowers.

"Microfinance is an instrument against poverty," says Harihar Dev Pant of Nirdhan Uthan Bank. "And I would say that we in Nepal have been able to successfully replicate the model of microfinance to reach its objectives."

HANDS FULL: DEPROSC clients in Lamatar meet monthly to pay their installments, check on savings, and share experiences.
While it was the government that introduced microfinance to Nepal with the establishment of the Grameen Development Bank in the early 1990s in each of the five development regions, it is the private sector that is now surging ahead with microfinance initiatives. A recent regional conference on microfinance hosted in Kathmandu indicated that Nepal is performing well compared to the rest of South Asia. After Bangladesh and India, Nepal has achieved the most in terms of clients, services provided, and institutional development.

Microfinance services here are provided chiefly through microfinance development banks, NGOs, and cooperatives. These institutions operate in over 55 districts, extending financial services to those who did not have access to them earlier. Average loan size is Rs 15,000, usually to be paid back over the period of a year. Institutions claim an impressive recovery rate of over 98 per cent.

Cases of default are rare because instead of servicing individual clients, microfinance institutions in Nepal form groups of borrowers. In the absence of collateral against loans, it is the group that acts as the guarantor and a borrower feels morally obliged to pay his or her loans back on time. Microfinance institutions, recognising that financial management is especially difficult for those unused to banks, go step by step with their clients. They first provide prospective clients with financial training, then monitor them closely through monthly meetings. "When a member of a borrowers' group is unable to pay, everyone pitches in," says Lok Hari Koirala, who works with DEPROSC Nepal. "This instills a collective sense of responsibility."

Microfinance institutions have plans for expansion, but the difficulty seems to lie in finding stable sources of funding for loans. While there are regulations in place that require commercial banks to allocate 3 per cent of their total advances to deprived sectors, not all of this money reaches microfinance. Nepal Rastra Bank (NRB) is now seeking to establish a 'Microfinance Development Fund'. "This fund will act as a wholesale lender and create special provisions for this sector," says Gopal Prasad Kaphle, Executive Director of the Micro Finance Promotion and Supervision Department in NRB. The central bank is introducing Microfinance Act that will integrate all microfinance institutions under second-tier institutions for regulation and monitoring. NRB has also open doors for microfinance institutions to collect public funds.

The challenge now is to ensure that the profit motive does not affect the commitment of those investing in microfinance in Nepal. Social responsibility is key to microfinance, and those implementing it should ensure the tragedy of Andhra Pradesh (see box) is not repeated here.


Mission drift

Microfinance institutions in India's Andhra Pradesh suffered a huge blow after legislation was passed that prevented them from deploying any agents for the recovery of loans. It was meant to address allegedly coercive actions the institutions had undertaken to recover loans from borrowers.

The legislation followed reports in October this year of over 80 suicides in the state, triggered by high interest rates and aggressive debt collection techniques by microfinance institutions. While it was taken to stop exploitation of poor borrowers, the legislation has in turn meant borrowers have stopped paying loans, crippling the microfinance industry.

Muhammad Yunus, the Bangladeshi economist who won the Nobel Peace Prize in 2006 for his Grameen Bank's pioneering work in microfinance, admitted the reputation of microcredit had been tarnished due to Indian commercial companies that charge high interest rates and allegedly use heavy-handed tactics to collect repayments. "It's a complete detour and nothing but a quitting of the mission of microfinance," Yunus said, responding to the crisis. "The original microcredit concept cannot be blamed for their faults."


High finance

While microfinance has been very successful in the Tarai, the challenge now is to move to the hills and the mountains. "Institutions are reluctant to go to these areas because of the high cost of operation," says Shankar Man Pradhan of the Rural Microfinance Development Centre (RMDC), a wholesale lender to microfinance institution. Settlements tend to be more scattered in the hills and the options for income-generating activities to be taken up with the help of loans are fewer than in the Tarai.

Nonetheless, microfinance institutions are beginning to acknowledge this service gap and some are now taking the initiative to extend their services into more difficult terrain. RMDC has been trying to incentivise organisations to begin work in the hills by providing loans with interest at only 2 per cent. Co-operatives like Himchuli Krishi, Hatemalo and Kasthuri have already taken up the gauntlet and are now working in the villages of Kalikot, Accham and Jajarkot.

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"Rebuild the t-r-u-s-t", INTERVIEW



1. Binoy Yonzon
Is it really true that RMDC provides loans in Nepal with interest rate of only 2%?  If that is the case then it is very impressive.  

But it also begs the question, how can these MFIs survive with only 2% interest charge.  I understand in India, MFIs charge in average of 30% interest rate.  Some of those in Andhra Pradesh actually charged stunning 60%.   Given all that, if our Nepali MFIs charge only 2%, then that would be truly amazing, not only from social ROI perspective but also from business operations perspective.

Do you mind verifying RMDC's 2% interest rate claim?


2. Radha Krishna Deo
Friends:This is very important program if it reach to remote hill market pocke and cover the bazar area of Teria.Region. People have started vegetable farming/ seasonal fruits/ and other feasible.It will change the face of face of women who killed her kids due to poverty. government should teach the all VDC secretaries to create awareness of this program.
Sacnepal


3. Govinda Bahadur Raut

Yes, of course Nepali MFIs are working in relatively accessible areas in the terai (Flat/Plain) and hill regions due to so far replicated model of microfinance (Grameen Banking System). As I know, Nirdhan Utthan Bank Ltd has introduced SRG (Self-Realient Group) model for hill region but this model is also limited with Nirdhan only. There is still lagging innovative model/system of microfinance for hills and mountain region. Deepening of the microfinance service in so far covered districts is other challenge for us.



4. Prashanta
Micro-finance is always linked with poverty reduction. But what we also need to address is what level of poverty does it address. Generally, micro-finance caters well only to people who are not destitutely poor, people who are better off than the worst. People at the lowest base of the pyramid find it hard to benefit from microcredit because they do not have sufficient time, energy and patience to wait for the incubation period of an enterprise. Such people want instant results.

Lending to groups and establishing group liability is a feature of the Grameen model. India's apex development bank NABARD came up with SHG (Self Help Group) model. The problem related to microfinance in Andhra Pradesh, India is more because of the over-commercialisation of microfinance sector. In India, microfinance sector was becoming a very attractive sector for investors and many fund/wealth managers were canalising investments towards it. If we really want to link microfinance with poverty reduction, we should never forget to address it as a social weapon or poverty alleviation tool and not interpret is as a commercial booster serving investors alone.


5. Nicola Craddock

Your readers may be interested to know that the phrase Small is Beautiful was coined by the economist E F Schumacher as the title of his book about economics 'as if people matter'.

2011 will mark 100 years since Schumacher's birth. Anyone wishing to find out more about this man and his remarkable ideas can find out more at www.ef-schumacher.org



LATEST ISSUE
638
(11 JAN 2013 - 17 JAN 2013)


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