07/11/2012
MicroFinance should "Run Before They Can Walk".
By: CommonClouds.net
Why the need to "Run Before You Can Walk!"?
“Run before you can walk!”… The phrase seems outrageous but not necessarily impossible. Babies of families among communities living along coastlines, such as the Badjaos of Mindanao, southern Philippines (as well as those in Borneo and Sulawesi), are known for their swimming ability even before they could stand and walk. Hmm… of course, it could be argued that swimming is just another version of crawling … on water. So how about running? Some parents may have witnessed the rare opportunity of seeing their babies ran even before the wobbly first step was taken.
The first “baby home run” was not really a leisurely adventure but an act of self-preservation or survival. The unexpected “run” would ensure that the baby would be able to grab the next furniture or person to cling on before losing his/her balance. With confidence gained through the “first home run”, the baby could then proceed to walking.
The microfinance industry could be in similar situation. While it has been in existence for about 3 decades, it is still in its infancy stage as compared to other financial institutions in the banking industry. Many MFIs all over the world are struggling for its financial survival that undermines their ability in sustaining its operations of providing a very important service to its clientele.
On the broader context, if microfinance industry players will continue in learning how to walk (“business as usual”), they will be lagging behind other industries. Therefore, the MFIs "should run before they can walk" to be at par or surpass the productivity and effectiveness levels of other industries.
Microcredit is known and widely acknowledged enabling intervention in meeting the needs of the poor, for financing personal or entrepreneurial needs. The MFIs exist not just for its own financial survival but operates in a symbiotic relationship with its clients. As such, the MFIs must maintain its financial viability in sustaining its strategic and enabling service to the poor.
The symbiotic relationship however, may not always work for the benefit of both the MFIs and its clients. It could also result to their downfall. There are documented cases of widespread loan repayment defaults with huge amount of uncollected loans that undermined the financial survival of the MFIs. On the other hand, poor families were ruined with enormous debts were placed in situation much worst than before they availed of microcredit. In some cases, some people committed su***de as the option of “getting out of debt”, as in the case of some families in Andhra Pradesh, India.
As reported in the article “Limping Back”, in the October 14, 2012 issue of the magazine Business India written by Mr. Ryan Maxim Rodrigues, the government intervened after the increasing incidence of su***des in Andhra, by encouraging its people, with enormous debts to MFIs, not to pay their debts to the MFIs. The article reported that “Andhra is not the only place where borrowers were asked not to pay their loans” since the same situation happened in Nicaragua, Bolivia, Peru, Valenzuela, Morocco, Bosnia, Pakistan before it happened in Andhra Pradesh.
In most cases, the enormous default on repayment was caused by multiple microfinance loans of individuals who eventually were not able to pay their enormous debts. In such situation, the government carried out interventions in addressing the increasing social cost of individual loan defaults. While the intervention of asking individuals not to pay their loans protected the borrowers, it has a crippling effect on the operations of the MFIs. As such, there could be other remedial measures that will avoid the re-emergence of a similar crisis situation.
The article “Limping Back” reported on measures taken towards avoiding massive loan defaults such as the creation of the regulatory body on MFIs and also the establishment of a credit bureau. Hopefully, these interventions will restore the trust and confidence for the symbiotic relationship to blossom again for the benefit of MFIs and its borrowers.
The regulatory body and credit bureau could be considered measures that will help MFIs in operating beyond the “business as usual” manner. However, the MFIs are not mainly responsible in “running” these interventions since these are being carried out by the government or institutions beyond the MFIs. As such, there is still a need to explore other platforms where the MFIs would have a better way of managing information towards minimizing or avoiding widespread incidence of multiple loans.
The Commonclouds therefore, is being offered as a possible platform in helping the MFIs reduced the incidence of clients having multiple loans, within their respective branch networks and/or in partnership with other networks of MFIs. It provides a tool of managing information with built-in mechanisms for self-regulation and maintaining autonomy of operations MFIs while also promoting cooperation and partnership among networks of MFIs, financial institutions, government agencies as well as national and international development agencies.
Avoiding the incidence of massive and uncontrolled multiple loans would be beneficial for both the MFIs and its clients. In reestablishing evidence-based decision-making and accountability of both the MFIs and its clients, the symbiotic relationship could be nurtured and flourished towards improving the income potentials of the MFIs and most importantly, the clientele of poor families. Eventually (and hopefully), a more favorable operating environment would emerge where the operation of most of the MFIs would just be “a walk in the park.”
