Time to step up microfinance programmes

I think the powers that be really need to step up and look more aggressively at microcredit or microfinance (the term is interchangeable) schemes in Malaysia. The M'sian economy is obviously not immune from the global economic challenges of rising oil and food prices and, worse still, being weighed down by the M'sian economy's inefficiencies and lack of productivity like the proverbial albatross hanging on the neck.

At the fringes of the economy are the poorer classes who need funding for their small business enterprises. Rather than to fritter away the revenues from Petronas in the form of subsidies, the federal government should seriously put in place a fund designated for microfinance.

Microfinance is not new to M'sia
Microfinance is not new to Malaysia. It has been operated by credit unions, co-operative banks and specialised credit windows of banks. Microfinance services of financial credit range for about RM10,000 and mostly to finance small businesses, agricultural loans and loans for poverty reduction.

Presently, the rural credit institutions comprising of Bank Pertanian Malaysia (BPM), Farmers Organisation Authority (LPP), Federal Land Development Authority (FELDA), and agro-based Co-operative Societies provide micro credit for the agriculture sectors.

There are a number of non-government organisations (NGOs) that engaged in microfinance. These include Yayasan Usaha Maju operating in Sabah, Koperasi Kredit Rakyat in Selangor and the best and significantly known microfinance institution (MFI) is Amanah Ikhtiar Malaysia (AIM).

The last significant govt announcement on microfinance
The federal government announced an economic package in May 21, 2003 to generate economic activities by mobilising domestic sources of growth while reducing the M'sia's dependence on the external sector, Bank Pertanian Malaysia (BPM) was given the allocation of RM500 million and Bank Simpanan Nasional (BSN), the allocation of RM300 million to carry out their respective microfinance programmes. The loan programmes were aimed at giving loans to individuals and small enterprises who do not qualify for existing bank products due to the lack of good collateral/guarantors. The loans were to be given based on the cashflow from projects presented by applicants.

Thrust of microfinance programmes

Microfinance refers to giving small loans to poorer segments of the population at subsidised interest rates. A broader version of microfinance has evolved with revolutionary approach to development finance with the provision of financial services such as credit, savings, insurance, money transfer to poor and low income households and their micro-enterprises. The role model is, of course, the Grameen Bank of Bangladesh.

Microfinance around the world has demonstrated that poor people with little education are reliable borrowers. They will invest wisely and are willing to save if given the chance. Experience has shown that women are the best borrowers and are better at repaying their loans.

Microfinance was initially offered by different kind of institutions, informal and traditional systems, local and international NGOs funded by donors, cooperatives and credit unions, local government institutions, specialised financial institutions and ultimately by regulated, formal commercial financial institutions.

The aim of microfinance should be to create out of the poor households, highly motivated individuals who are committed to earn an honest living and eventually move out of the poverty level.

Recommended lending strategy
The strategy to be adopted is to give out to borrowers interest-free loans to undertake income- generating projects. The loans are to be repaid on a weekly basis. Once fully paid, bigger loans are being offered. This process goes on as the need arises. The first loan is proposed to be restricted to RM1,000 up to a maximum of RM4,000 for follow-up loans. Successful borrowers may apply for a much bigger loans of RM5,000 or even up to RM10,000 at the discretion of the management.

Following the model of the Grameen Bank, poor borrowers are required to form groups of five who in turn guarantee each others’ loans. These households will undergo a one week compulsory training of one hour per day to understand their rights and obligations in order to ensure good repayment.

Loan programmes to consider
I do not claim to be expert in this area of microfinance. But, it seems to me, to be logical to consider the following programmes:-

Loan Scheme 1
Loans to poor households with average monthly income of not more than RM800. Initial loans are up for a maximum of RM1,000 increasing to RM2,000, RM3,000, RM4,000 and RM4,900. The loan repayment period is between 50 weeks to 100 weeks.

Loan Scheme 2
Loans between RM5,000 to RM9,900 to borrowers who have made good repayment from the previous two loans and having a monthly income exceeding RM800. The repayment period of the loan is between 50 to 150 weeks.

Loan Scheme 3
Loans up to RM10,000 to borrowers with good track record with perfect repayment for at least 2 times Loan Scheme 1 or Loan Scheme 2 and having a monthly income exceeding RM1,000. The loan could be repaid up to a maximum period of 150 weeks.

Single Mother Loan Scheme
Loans to single mothers living in town areas. The aims of the scheme should be to increase the living standard of single mothers and motivate them to undertake stable economic activities to support the family. Eligibility for the loans should depend on the household earnings and varies within states. Given the different costs of living in different parts of the country, some consideration may have to be given geography. For example, the test could be that household earnings for those living in Kuala Lumpur and Johore should not exceed RM1,200; Selangor, Malacca and Negeri Sembilan RM800 per month; Kelantan, Terengganu and Kedah RM425 per month; and Perak RM600 per month.

In addition, we can consider Special Education Loan Schemes up to RM1,000 with maximum loan period up to 50 weeks, and Special Housing Loan Schemes up to RM5,000 with maximum repayment period up to 100 weeks should be available to borrowers with good repayment record.

Modality for an effective microfinance programme
Means tests should be used to identify the eligibility of loan applicants. Priority of loans will be given to the poorest among the poor.

Key success factors in microfinance programmes
The requirements of microfinance programmes include the creation of suitable loan conditions featuring no collateral, no guarantor and no legal action. It has been found that mobile crews should be created to ensure that microfinance facilities reaches the poor in the localities since poverty-stricken people are very immobile. In addition, simple procedures should be adopted.

The formation of groups of borrowers by potential members, typically 5 members in a group with equal socio-economic status, creates the right peer pressure and peer support. This is a key factor in the low default rate for the Grameen Bank. Generally, these groups must accept collective responsibility for the loan servicing.

Will the federal govt consider stepping-up microfinance programmes in light of current economic conditions?

Let's face it, poverty is evident in M'sia whether the economic is booming or contracting. But, now, more so than ever, is the time for a more aggressive approach to creating microfinance programmes.

Microfinance is certainly a better approach to assisting poorer M'sians who live in the fringes of society. It is far, far better than a passive scheme of subsidising consumer goods. As Grameen Bank states in its website, There has also been a shift from agricultural wage labour (considered to be socially inferior) to self-employment in petty trading. Such a shift in occupational patterns has an indirect positive effect on the employment and wages of other agricultural waged labourers. What started as an innovative local initiative, "a small bubble of hope", has thus grown to the point where it has made an impact on poverty alleviation at the national level.