Barun Roy: The micro-credit business

ASIA FILE

It is no longer being driven by egalitarian concerns but as a business where profit is the motive.

At a recent seminar on micro-credit and entrepreneurship in Santiniketan, Nabard (National Bank of Agriculture and Rural Development) chief general manager G L Tawte said micro-lending made good investment sense, and to emphasise the point he told a story. Every time he came to Santiniketan, he said, he bought Durga masks from the local bazaar for Rs 50 apiece and sold them to friends, back home in Maharashtra, for Rs 110 each.

What he was trying to say was that this should be looked at as a business. You fund the poor to help improve their lot, and market their products to earn a good return for yourself. The field is wide open and largely untapped, which is why even commercial banks like ICICI have decided to go into rural credit in a big way.

It's not difficult to foresee what's going to happen. Private investors will gradually take over the role that non-government organisations (NGOs) now play and join hands with commercial banks to create a new platform for delivering rural credit services. But will it be micro-credit in the true spirit of the term? When the programme begins to be increasingly linked with the formal money market, where profitability is the main concern, will the poor get a fair price for their labour? After all, Tawte's margin of profit doesn't look quite equitable.

If the idea of micro-credit as conceived by Muhammad Yunus, the pioneer of the movement and founder of Bangladesh's Grameen Bank, is to help even the poorest of the poor to be financially independent of loan sharks and gradually take control of their lives and livelihood, through their own production and marketing efforts, that idea is clearly undergoing what social scientists describe as a paradigm shift. The programme is no longer driven purely by egalitarian concerns "" nor are its funds coming solely from beneficiary savings, grants, and donations "" but as a business where profit is the motive and the poor are just stakeholders along with private investors and commercial banks.

Even in Bangladesh, where NGOs still have the control of the programme, the situation is changing fast. Many NGOs are actually encouraged to borrow from banks, and the entire chain from sourcing funds to delivering them to the poor is managed with one singular concern: sustainability. And to banks, which don't believe in subsidies, sustainability surely has a different meaning.

There's another aspect of the NGO story in Bangladesh that reflects the growing shift. It's the NGOs' increasing dependence on government resources. For example, the Palli Karma Sahayak Foundation (PKSF), an apex micro-finance organisation whose chairman is nominated by the government, has so far distributed Taka 2,125 crore of government patronage through 225 small and big NGOs to benefit some 5 million poor people. Over 1,000 NGOs are now implementing micro-credit programmes in that country and they all survive, to a greater or lesser extent, by channelling government funds. This throws the programme open to possible political pressures, bureaucratic abuses and corruption.

In fact, NGOs in Bangladesh are totally unregulated. A law that would make them more accountable and transparent and would allow them to accept deposits of savings from micro-credit borrowers has been talked about for the last four or five years but hasn't been brought into being. There are many instances of fake NGOs and institutions taking deposits illegally and plundering the hard-earned savings of the poor.

The essence of the problem, of course, lies in the growth of the micro-credit programme itself. Donor money and grants are no longer enough to cater to the entire demand. Even borrower savings can't meet the diverse needs of the programme, whose character itself has changed. Micro-credit is no longer confined to small projects alone.

Micro-financiers start by lending small amounts but repeat loans of progressively larger amounts have come to dominate their activities. At the Santiniketan seminar, PKSF's deputy managing director Parveen Mahmud spoke of borrowers scaling up their income-generating activities and moving to own even medium-scale enterprises. The challenge, she said, as micro-credit borrowers begin to step out of the poverty trap, is to devise appropriate, innovative and diversified financial products along with safety nets, business development services, and linkages with the formal financial sector.

Which is all very good. But, in the process, aren't we moving away from the essential philosophy of micro-credit itself? Having just concluded the UN-designated International Year of Micro-credit 2005, this is the question we should be asking. We certainly want the poor to graduate, but we don't want only a handful of them to do so. We want the vast multitude to emerge from absolute poverty and, as Mahmud herself admitted at the seminar, they still remain the most credit-starved and largely outside of the programme. Given the programme's shifting emphasis and character, will they ever be in?