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“They need to borrow more for running their small businesses, which are their only source of livelihood, but following the global financial meltdown, funds have suddenly dried up for us. Even state-owned banks are wary of lending to microfinance lenders like us,” said J.S. Tomar, founder and managing director of Casper Microfinance.
So Ramaa had to pawn her shop to borrow from a local landlord at an exorbitant interest rate. “If I default in paying back, I stand the risk of losing not only my livelihood but my home as well,” she said. The small grocery shop she runs out of a small shack that doubles as her home is her only worldly possession.
However, Ramaa is not alone. “I have hundreds of borrowers who are suffering like her,” said Tomar, whose company has lent about US$30 million to almost 100,000 small and poor borrowers in India.
While Casper Microfinance is gasping for funds, business for many small and medium-sized microfinance institutions is worse and has almost come to a halt due to paucity of funds.
“The global credit crisis has made hard cash a scarce commodity the world over, which is making most microfinance institutions in India scout for funds,” said a spokesperson from Sa-Dhan, the New Delhi-based association of microfinance lenders. “Many small lenders are even finding it difficult to carry on.”
“The problem is as bad for Bangladesh and Pakistan, where the microfinance sector too is strapped for funds,” said the Sa-Dhan official. The credit crisis originating from the West is sweeping mostly the rich economies and greatly affecting big financial institutions. However, millions of poor in South Asia are feeling its ripple effect.
With over 62 million poor in India, Bangladesh, and Pakistan depending on small loans to eke out a living, South Asia is the world’s largest microfinance market. This is also a region where, according to the World Bank, the microfinance movement has challenged the conventional financial sector, influencing government thinking and fundamentally altering the financial landscape.
“Just like any other business, small and tiny businesses too are facing a slowdown, and that has generated a greater demand for microfinance. But with little access to fresh funds, the microfinance sector’s growth in Pakistan has almost slowed to a snail’s pace,” said Roshaneh Zafar, founder and managing director of the Kashf Foundation, Pakistan's third-largest microfinance institution.
Unlike India, which has over 33 million small borrowers, Pakistan has just about 1.7 million poor depending on this source of funding. Yet, “microfinance has become essential for creating a stable environment for Pakistan’s economy as a whole,” said Zafar.
Microfinance refers to financial services for the poor and low-income segment of society. However, the term is often used more narrowly as small loans and other material assistance that organized lenders provide to poor and unsalaried borrowers, taking little or no collateral, to help them earn a living.
Despite being around for centuries, microfinance has attracted global attention only recently. In 1976, Bangladeshi entrepreneur Muhammad Yunus, who founded the Grameen Bank, adopted this powerful form of lending to finance millions of poor people in his country. He and his bank were jointly awarded the Nobel Peace Prize in 2006, “for their efforts to create economic and social development from below.”
Today, the microfinance sector has lent US$30 billion to over 150 million people the world over. South Asia is the fastest growing region with 60 percent annual growth in the past few years. Experts predict that if the region can sustain such growth, its microfinance outreach could expand by four times within the next few years. But given the current funds crunch, even a quarter of the past years’ growth rate may be a lofty goal to achieve.
“We needed US$70 million to reach out to 550,000 new borrowers by end of this year. But we were only able to raise about 20 million, as a result of which we have actually not grown at all,” said Zafar.
According to the Pakistan Microfinance Network, the lenders need US$600-$700 million to reach a target of 3 million individuals by 2009. “But that may be a serious challenge under the current credit squeeze, which is threatening to stall the growth momentum this sector has achieved over the last few years,” the network said.
In India, the credit crunch has divided the sector as well. “While the big lenders have managed to garner funds locally as well as from foreign equity investors and mitigate a part of the funds shortage by virtue of their size, it is the small and medium-sized lenders that are bearing the brunt of the cash crunch,” said N. Srinivasan, a microfinance expert who has prepared a report on behalf of the sector.
In fact, the credit crunch is also forcing many lenders to move away from microfinance’s core focus. “Some lenders have started serving only the top layer of the so-called poor sections of the society and not the real poor,” says Srinivasan. “Their focus is more on profits, risks, and the ability to get the maximum returns out of very limited funds.”
In Bangladesh, industry players say that though the global financial crisis has not directly affected its microfinance sector, the country’s 28 million small borrowers are suffering in a different manner. “In Bangladesh it is more of an internal problem,” says Shabbir Ahmed Chowdhury, director of the Bangladesh Rural Advance Committee, which calls itself a poverty alleviation agency empowering the poor.
According to Chowdhury, the country’s biggest problem is that its commercial banks typically serve no more than 16 percent of the population, which leaves a large section of the poor with no access to formal financial services. That section is served by about 1,000 microfinance lenders, who by local rules can only borrow from large financial institutions, mainly banks.
“These large financial institutions in turn are limited by banking regulations that do not allow lending beyond a certain limit to a single borrower. So in a way, microfinance lenders are stuck for funds too, since most have exhausted their limits and can’t borrow any more, which has become a hurdle in expanding the sector’s outreach,” said Chowdhury. “Ideally, this sector needs to reach out to external sources of funding, but it is not easy to get permission (from the government) and neither are external funds available these days.”
Nevertheless, even as some say that the global financial crisis is the disaster of a lifetime, Yunus, the pioneer of microfinance, believes that it also presents an opportunity.
According to Yunus, large organized financial institutions the world over can use the current crisis as an opportunity to build businesses through microfinance, where loans are real, transparent and paid back by borrowers.
