Soon after the success stories of micro financing pioneers like Grameen Bank of Bangladesh travelled to all parts of the world in the late seventies, there occurred an upsurge in development of this new segment of the financial sector in almost all the developing countries.
Until recently a majority of the Micro Finance Institutions (MFIs) depended on funding from donors or their governments, hence the failure or mortality rate of such MFIs everywhere has been very high due to their least concern for sustainability of operations.
The nature of financial services to be catered for financially disadvantaged segments of the population and restricted operational environments, particularly in the context of the size of the loan and restricted avenues available for investment of surplus funds and above all vulnerability of the clients have been the main impeding factors for attaining sustainability of the operations, hence very few MFIs, particularly those whose capital base continues to be recouped through foreign donors or those who really cared for sustainability of their projects and went into lending and deposit taking business simultaneously and prudently, could survive.
The majority of such viable MFIs relied on group lending even that secured against overall group's tangible assets like group savings with the MFI concerned.
In order to achieve Millennium Developmental Goal (MDG) of halving the poverty by the year 2015, a number of developing countries ventured into regulating and supervising operations of MFIs through regulatory policy framework of their central banks and providing opportunity to NGO-based MFIs to get converted into a micro finance bank.
In this country also the State Bank of Pakistan in order to promote meaningful and sustainable micro financing issued Micro Finance Ordinance 2001 for regulating and supervising the operations of MFIs and Micro Finance Banks (MFBs).
For setting up a micro finance bank a minimum paid up capital requirements have been laid down on the basis of the size of the operations and guidelines have been provided establishing board of directors and appointment of chief executive, so as to ensure competent and accountable top management and policy-makers at the helm of affairs.
The prudential regulations giving the eligibility criterion of a borrower, fixing maximum size of the loan and strict and mandatory provisioning requirements for defaulting loans right from the early stage of default and compulsory writing off of a loan if it remains in default for a year have created an environment conducive to attaining sustainability.
However, this objective is attainable provided MBIs uphold the principles of good governance measured through financial sustainability, outreach of the organisation and its impact in terms of economic empowerment achieved by its clients.
Micro finance banks and MFIs are in business for providing basic financial services, through various loans and saving instruments to the financially disadvantaged segment of the population.
This enables them to set up or expand their micro businesses, generate income and build up risk efficient assets portfolio of both movable and immovable properties and smoothen their consumption pattern through building up their savings in profitable saving schemes to provide cushion in situations of crop failures and other natural calamities etc.
In a situation of natural shocks coming to the business of the clients, sometimes it becomes incumbent upon MFIs and MBIs to provide additional financial assistance to their clients to re-establish business or rehabilitate work in case of natural calamities like earthquakes and floods etc.
In Pakistan those affected from recent earthquake in Northern Area and Azad Kashmir, particularly people from low income class, are in need of rebuilding their damaged houses and reviving their businesses.
Micro finance banks, both in the public and private sector operating in those areas, must come forward to float special loan products carrying soft terms, keeping in view their repayment capacity so that they are able to revive their businesses and rehabilitate themselves without defaulting loan repayment at any stage.
Further, MFIs and MFBs must endeavour to offer loan and saving products and other ancillary services according to the changing needs of the clients. This necessitates creation of research department for development of innovative products on continuous basis, which are not only beneficial for all segments of clients but also involve low transaction cost.
Apart from floating loan products according to peculiar needs of cross sections of financially disadvantaged population, they need to add innovation and value to the set of their various credit schemes by providing support services like market linkage in order to enhance viability of the client's business, which in turn ensures timely and safe return of MFI's funds, thus reducing transaction cost.
Clients, particularly those from rural areas, market their products through middlemen, hence do not get a fair price. MFIs/MBIs, having branches in big cities, can develop market linkage for their rural area clients for products like milk and fruits etc with manufacturing concerns of dairy products, fruit juices, jams and jellies and other preserved food items to ensure not only better price for the products through elimination of middlemen, but also regular supply of raw materials to the manufacturing concern. This also ensures regular recovery of loan from the borrowers.
Normally owners of micro businesses are in a disadvantaged position regarding bargaining with middlemen or ultimate buyers due to their lack of knowledge of the market trends, poor packing of their products and their inability to hold products, particularly of food items till they get desired price.
MFIs/MBIs must arrange to provide orientation to clients in the areas of packing, basic marketing techniques, cold storage facilities, behavioural skills, particularly assertiveness to develop their bargaining skills.
This will not only enable the clients to get better price for their products, but also new avenues of business like packaging and cold storage business would be available to go into with the help of extended loan (within maximum limit of the loan size allowed) from the MFI concerned.
This in turn will augment core business of the MFI concern, which is a key to their sustainability.
Following the profile of activities of foreign funded 'Grameen Bank of Bangladesh' MFIs and MBIs in developing countries are often motivated to provide non-financial services like education to their clients and at the same time their legitimate concern for sustainability prevents them from entering this area of activity.
In this regard group approach to lending can help MFIs to provide low cost business and vocational education to their clients just to improve the performance of their business, which will ultimately add to sustainability of MFI itself.
No doubt transaction cost with MFIs/MBIs is exceptionally high due to their providing services at the doorsteps of their clients in the far-flung areas. In this regard efforts should be made to develop such a delivery and collection of loans mechanism that transaction cost as well as risk involved is minimised.
In this context setting up fully computerised satellite units, forming linkage between far-flung/rural areas clients and branches in urban areas would be a feasible strategy, saving large capital and recurring cost involved in having a full-fledged branch in an area where operations are not expected to be viable for quite a long time.
Under this set-up loan applications would be collected by satellite unit and particulars of would-be borrower communicated to the designated branch on line and on receipt of approval from branch/regional office the satellite unit will arrange disbursement of loan through a bank having a wide network of branches or through area post office with whom agency arrangements are established for the purpose.
In Pakistan one of the MBIs in the private sector has successfully started operations on this pattern in far-flung areas of Punjab, Sindh and Northern Areas of the country.
At initial stage when core business of a micro finance institution has not developed much then unutilised funds need to be invested prudently in government securities and other avenues coming within the purview of permissible treasury transactions to make the operations sustainable right from the very beginning.
However earnings from the sources not forming part of core business of MFI/MBI should not be considered a parameter to assess their viability/sustainability. Apart from financial viability, social welfare of the clients and improvement in quality of their lives should also be the parameters to determine the level of operational efficiency of a micro finance entity.
In this regard, apart from the amount disbursed outreach level should be the criterion for determining the performance rating of an MFI.
Generally ratings have been focused on financial and management performance of MFI/MFB. No doubt sustainability is a vital issue for any financial organisation, but for a micro finance institution sustainability is not an end itself. It is a means to an end. MFIs/MBIs have a social mission. Credit rating of an MFI is needed to be linked with its social rating.
Social rating is a graded assessment the ability of an MFI/MBI to reach and serve the target market. It is a tool to determine whether an MFI is achieving or likely to achieve (if MFIs are assessed at start up period) its social mission and whether its social objectives are in line with wider development values.
Social rating when combined with credit rating compares social and financial performance and facilitates or gives justification for additional funds allocation to an MFI at the start-up period and also for those who have not yet reached financial sustainability stage but are strong on social parameters.
Further, it is common with MFIs that in view of their limited avenues of transactions, little attention is paid towards quality of the staff. In view of their dealings with a vulnerable segment of population, they need to induct high calibre professionals, particularly in the area of research and marketing, not only to widen the spectrum of viable loan and saving products, but also to facilitate creating viable business environment for their clients.