Sustainable microfinance: The Asian landscape
Asia is home to the lion's share of today's poor, says Perry Wong, director of research at the Milken Institute. To put that into perspective, the region alone accounts for 63 percent of those living in extreme poverty, with 246 million in East Asia and the Pacific region and 507 million in South Asia. In developing countries more broadly, as much as three-fifths of the total working population earn less than $2 a day and one in five people live below the extreme poverty line of $1.25 a day. What are the most beneficial tools and self-help strategies for raising incomes in these regions? A recent Institute report, Sustainable Microfinance in Asia,backs aggressive development of the microfinance sector, which provides small-scale loans and other services to low-income people, many of whom have no bank accounts. Wong authored the report with Nan Zhang.
Microfinance, as a tool to reduce poverty, has room to expand in Asian societies. Despite its growth in the world economy and advocacy from the United Nations, microfinance has a limited presence in the bottom 40 percent of the global income scale.
Currently, Bangladesh's microfinance penetration is one of the highest in the world, with the proportion of female borrowers at a remarkable 94 percent. Initially driven by grants from donor agencies, funding sources in Bangladesh are now mainly derived from investors and bank deposits. To create an enabling environment for microfinance opportunities, the Bangladesh government created the Microcredit Regulatory Authority (MRA) in 2006 to set an interest cap of 27 percent (annualized) and make loans more affordable to borrowers. This also challenged sources to pursue both profitability and sustainability, since revenue from interest rates are limited. Good examples include Grameen Bank, founded by Nobel laureate Muhammad Yunus, and Bank Rakyat Indonesia.
aEURoeSuccessful microfinance should satisfy the social development of expanding outreach to the poor as well as the business development of becoming operationally or financially sustainable? Zhang advises. Only when microfinance institutions [MFIs] are financially independent or sustainable can large-scale outreach to the poor be possible on a long-term basis without a heavy dependence on subsidies.
Top Asian countries with the highest MFI outreach (2011)
The keys to MFIs becoming profitable, self-sufficient, and effective in alleviating poverty are contained in four recommended policy changes. While they are only touched on here, the report provides an in-depth analysis.
The first point is about fostering the right environment to support microfinance development. Policies such as limiting interest-rate caps and subsidized loan programs, and creating educational programs for financial literacy, should be established.
The second initiative comes from efforts to develop a regulatory infrastructure to help MFIs raise funds from multiple sources with appropriate risk management. Institutional mechanisms such as credit bureaus and rating agencies should also be established to create a standard of transparency and accountability.
The third priority involves strengthening financial performance through attracting foreign investment and diversifying financial models and funding sources. By doing so, MFIs would become less dependent on interest rates, while reducing costs.
Finally, advancing the use of technology so that it provides financial services through touch points such as smart cards and mobile phones promises to yield great results. As demonstrated by the success of "mobile money"essentially cellphone banking— in Africa, the microfinance sector should build a technological infrastructure thataEUR(TM)s widely accessible and secure.
Asia, as the region with the largest destitute population, has the greatest need for financial inclusion. As microfinance is increasingly recognized as a powerful tool to assist low-income populations, Asian governments and microfinance institutions must ensure that their systems meet immediate financial needs and are expandable and sustainable over the long term.