Capitalize microfinance for transformation of lives at margin

By Krishna Sapkota

Kathmandu: The Monetary Policy recently unveiled by Nepal Rastra Bank for the fiscal year 2073-74 BS has created ripple among the microfinance bankers and practitioners mainly due to its tough stance on interest spread rate. The central bank seems to tighten screw on microfinance institutions acting on complaints that these institutions are working against its philosophy of enhancing easy and affordable access to finance to the low-income people.

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Interest spread refers to the difference in borrowing and lending rates of financial institutions in nominal terms. In order for microfinance institutions to limit their profit margin, the central bank is imposing a maximum of seven per cent interest spread. However, the bankers have criticized the new policy as a mala-fide ride to brush off microfinance institutions and their services as the average operational cost of microfinance institutions itself is over 9 percent now.

Hence, the set spread rate, 7 percent, would not even cover the operational cost and there are other costs that need to be considered while pricing microfinance loan. The practitioners therefore think that this move would jeopardize the poor people’s access to finance.

 The stark reality is that neither the state has reached out to the poor with any mechanized schemes nor other financial institutions have substantially penetrated their services to the disadvantaged section.

“Against the backdrop, the microfinance institutions are widening their reach to the poor households albeit not to entire hardcore poor”, says Basanta Lamsal, Chief Executive Officer of Vijaya Laghubitta Bittiya Sanstha (VLBS) based in Gaindakot, Nawalparasi.

Microfinance programme has been one of the effective tools towards realizing state's broader objective of reducing poverty level and transforming socio-economic status of people living at the margins in Nepal. It works with groups on group guarantee basis and normally does not seek physical collateral when it provides credit to the poor.

The Government of Nepal had recognized microfinance as an official poverty alleviation tool in the country’s Sixth Plan (1980/81-1984/85). In addition, the government has laid emphasis on the sector as an important financial tool to reach out to the poor through 'deprived sector' lending.

To the contrary, the monetary policy has imposed tough provisions on the sector undermining its essence and emergence to widen the financial reach of the low-income households. The sector's contribution to the welfare state’s efforts towards reducing poverty and transforming lives of lower-rung could not be expected if the environment conducive for microfinance sector to thrive was not enabled. Reportedly, there are still nearly 60 percent people who are out of banking network. Hence, microfinance institutions could be critical to bring the unbanked population into the banking network and serve the Nepal Government's plan 'One Household, One Bank Account'.

Need to regulate rather than stem the MFIs

There are several malpractices and anomalies in the operation of microfinance business. It is accused of a means to amass property in no time by charging exorbitant interest rates to the downtrodden people. The dire need is to regulate such practices through effective policy interventions.

It would be erroneous on part of the welfare state to take stride in a way to defunct the structures which are closely working with people who have less access to services.

The prudent act is to remove the wheat from the chaff and introduce pragmatic policy based on evidence. Hence, it would be rather injustice to limit the role of microfinance institutions adopting a blanket approach.

“Mainly two provisions of the recent Monetary Policy – 7 % spread rate and constraint of resource flow to microfinance institutions resulting from obligatory imposition to commercial banks to lend at least 2 percent of their total loan portfolio to the deprived sector on their own – have direct bearing on microfinance”, noted Lamsal, who is also a member of the Microfinance Bankers' Association of Nepal.

Currently, the deprived sector lending for commercial banks is set at 5% and the loan amount can be utilized either through microfinance institutions or on their own.

It is noted that the commercial banks are the financial feeders of microfinance banks. The policy directive to involve commercial banks to perform the roles of microfinance is likely to limit funding flow to microfinance banks from commercial banks which will resultantly shrink the space and scope of microfinance institution as a development actor.

Likewise, the commercial banks themselves have stood against the policy arguing that it is not their expertise to handle microfinance service on the one edge and on the other the proposed spread rate does not even meet operational costs for the service.

It seems that the central bank has come up with the policy to get the microfinance institutions slashed their profit margin by reducing interest rate charged to the borrowers who are largely from remote areas and have less access to financial services.

The monetary policy also seems to inculcate corporate social responsibility to the commercial banks by channelizing their certain amount of lending to poor households. But, the policy, if implemented without wider consultation and evidence, will have direct impacts on the livelihood and transformation of the ignored section as it limits the smooth and sustainable flow of financial service to poor with the shrinks of microfinance institutions. It will further discourage the financial institutions, particularly the MFIs, to provide financial services to the poor living in remote areas.

Hence, this is high time to explore win-win among the policy-making body, implementers and end beneficiaries. The policy should be revised in a way that would create environment for microfinance to survive and for the beneficiaries to have easy and affordable access to financial service. Rather than imposing spread rate, the central bank should set a moderate ceiling of interest rate (interest cap) that microfinance institutions can take from borrowers.

Let the microfinance institutions be regulated so as to keep them alive with better practices and allow their potential role for poverty reduction and socio-economic transformation.