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Conventional wisdom suggests that good things come at a cost.
Hence, something that works well with no apparent drawbacks is always
worth having a closer look at.
The microfinancing operations of the Bangladesh-based Grameen Bank,
whose founder was awarded the Nobel Peace Prize last year, are seen by
many as falling into the above-mentioned category.
In Indonesia, the apparent success of the Grameen-Bank model has
aroused the curiosity of many. However, can microfinancing really be
something that is both economically viable and capable of fulfilling
the social duty of poverty alleviation?
Based on common sense and an analysis of conditions in Indonesia, there
are a number of clear prerequisites for successful microfinancing.
First, for a loan to be economically viable, there must be a floor on
loan size. An interesting phenomenon in this regard is the prevalence
of loan sharks in many villages.
Loan sharks charge about 70 percent per annum for loans as small as Rp
500,000 (about US$55), with payment terms being weekly.
Why aren't these loan sharks being sidelined by new competition (i.e.,
from the banks or other formal institutions)? The main barrier to the
entry of competitors is probably high operating costs. If one were to
employ a debt collector to go around and collect weekly payments, this
would obviously be costly.
Assume a villager borrows Rp 500,000 for three months. Twelve payments
at an interest rate of 70 percent a year would require installments of
around Rp 45,000 per week, and interest income earned for three months
would amount to Rp 44,800.
Even under a rosy scenario where the creditor hires an employee to
visit seven customers per day, six days a week, he will only take in
close to Rp 1.9 million per month from some 42 clients. In practice,
the collector's wages, transportation costs and bad debts would have to
be deducted from this amount, leaving a minimal margin for the creditor.
Second, there would have to be some minimum-income-level requirement
for a business or family to be eligible for a loan. Many middle-income
Indonesians have experienced just how hard it is to prevent a domestic
maid from going home during lebaran. Buy her clothes, give her pocket
money, allow her several days off, and she will still decide to leave.
In contrast, a household driver, who is often paid more, is usually
easier to retain. The point is that there may be a certain salary
threshold that compels people to stay. The same applies to borrowers;
they may only feel obliged to pay if not doing so puts their
livelihoods at risk. Otherwise, they may just walk away.
Third, installments should be collected at the same time as the
borrower receives his income. Microfinancing serves segments that have
hand-to-mouth cash flows; whatever is earned will be consumed the same
day.
However, with prompt collection comes the need to control the cash
payments received. If control is lax, money received by the collector
may not end up in the creditor's hands. As the salaries of collectors
are usually just a tad over the minimum wage, a creditor may come
across excuses such as "I got robbed on the way", "Oops, dropped the
money somewhere", or "Couldn't find the client".
Based on these three prerequisites, it could be argued that Grameen
Bank may not be as successful as it appears.
The customers it serves are the poorest of the poor, and loans are
presumably small; it is unclear whether they are sustainable on a
commercial basis. Furthermore, loans to the poorest of the poor run the
risk of being consumed rather than being put to productive use.
One good model for microfinancing is that applied by Indonesia's
publicly listed Bank BRI. In contrast to the Grameen Bank, BRI's loans
are much bigger (in the range of Rp 5 million to Rp 10 million).
Bank BRI also focuses on lending to borrowers with productive assets,
such as farmers, sidewalk food hawkers and wet-market vendors. Many BRI
employees also have respected positions in the community, including
serving as village heads and local neighborhood chairmen (Ketua RT).
From the borrower's perspective, securing a loan from BRI could lead to
one becoming known as a trustworthy person of good character. Another
institution following in BRI's footsteps is Bank Danamon, through its
subsidiary Danamon Simpan Pinjam. Danamon charges an average interest
rate of between 40 and 45 percent per annum, and focuses its lending on
traditional market vendors. Danamon employs a different approach by
focusing on the urban market.
Both Danamon's and BRI's approaches differ from Grameen's, which is
probably for the better. Microfinancing will only be sustainable if it
is commercially viable. Otherwise, those concerned would continue to
depend on grants and subsidies. And as conventional wisdom suggests,
grants and subsidies often lead to misallocations of resources, which
diminish the successes achieved in alleviating poverty.
There seems to be no panacea. Rather than financing the poor, it would
be better to expand their opportunities through supportive policies and
regulations that help to raise their competitiveness. Facilitate the
creation of an environment where sufficient critical mass and economies
of scale can be achieved.
So, is microfinancing viable? Yes, if there is a high-enough floor on
the size of loans and a minimum-income requirement. Accessing the
bankable can only be done in the case of the pre-bankable, not the
non-bankable.
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