Poverty alleviation and micro finance: Can Nigeria learn from India?

from Business Day

OGHO OKITI & IHEANYI NWACHUKWU

Despite the abundance of resources and oil wealth, poverty is still widespread in Nigeria.

Two years ago, specifically on December 15, 2005 the microfinance policy, regulatory and supervisory framework was launched to create a sustainable vehicle for the provision of microfinance services to millions of the active poor all over Nigeria. These active poor are those who do not have access to finance from the formal financial sector.

The launch of the microfinance policy was a great milestone and formed a vital component of a set of reform initiatives by Federal Government, comprising among others the National Poverty Eradication Programme (NAPEP), and the National Economic Empowerment and Development Strategy (NEEDS). These were set up to reduce poverty, increase employment, promote growth and development at the lower end of the financial market.

Presently, this administration is of the belief that making financial services available to the active poor will help towards achieving the Millennium Development Goals (MDGs). measures however would also be needed to make significant in-road into poverty reduction in Nigeria.

It is now obvious that the microfinance policy has shattered the myth that the poor cannot and do not save; shown that the poor are credit worthy; triggered a process toward broadening and deepening of rural financial markets; strengthened social and human capital of the poor; and also generated positive developments in microfinance policies and practices.

In Nigeria, there is a traditional perception of formal financial institutions to the grassroots, which include high risks and high costs involved in small transactions, low relative profitability, inability of the poor to provide physical collateral and business culture not geared to serve poor and low income households.

These formal financial institutions are also perceived to rely on meagre self-finance or informal sources, inability to produce collateral, high transaction cost, and will not entertain small amounts of transactions.

The micro finance institutions (MFIs) strategies include outreach and profitability; borrower selection and retention; loan terms; and repayment; efficient administration and operations.

Other strategies include: understanding financial needs of the poor; designing appropriate financial service delivery mechanisms, like group versus individual, no collateral requirement, banking on social asset.

Interestingly, these other strategies are used to reach the grassroots: branchless banking - bank reaches out to the grassroots clients; non-bank retail outlets; and use of technology - mobile banking.

Despite these strategies deployed, there are still some challenges to delivering these products. Some of these challenges are that many extremely poor people decide that their life are already risky enough without taking on debt; start up micro-enterprises are risky; need for non-financial support such as nutrition; health; training and others.

In Nigeria, there are financial exclusions in micro-financing. Most of these financial exclusions are: mono-products that impeded reaching the poorest of the poor, reaching the "missing middle". Others are: non-repayment due to external factors, ignoring constraints afflicting the poor that are often beyond the poor's control; limited reach in very remote rural areas (geographical reach); inability of MFIs to cater for agricultural communities; inability to develop financial products linked to remittances.

Nigeria is faced with some other challenges in delivering efficient micro financing services. These are: policy environment, inadequate financial infrastructure, limited retail level of institutional capacity, inadequate investments in agriculture and rural development, inadequate investments in social intermediation.

Economy watchers recognise that there are environmental conditions, which enable micro-financing to be effective. Some of them are: enabling legislation for MFIs; functioning commercial banking system; relatively dense population; skilled workforce; social capital; trust in the local currency and financial institutions; absence of hyperinflation; and also low intensity of conflict.

For Nigeria, the need to look into success stories of countries that have fully benefited from microfinance policy cannot be underestimated. At least, the stories about India's microfinance policy, development, implementation and impact need to be told.

India's micro-finance based poverty alleviation programmes
As part of the poverty alleviation measures, the Government of India (GoI) launched the Swarnjayanti Gram Swarozgar Yojana (SGSY) in 1999, where the major emphasis is on self-help group (SHG) formation, social mobilisation and economic activation through micro-credit finance.

Up to March 2003, 13.38 lakh groups were constituted in 33 states and union territories, of which 33,436 SHGs only could take up economic activities for their economic sustenance.

Simultaneously, the government supports the National Bank for Agriculture and Rural Development (Nabard) to take up activities such as group formation, micro-finance and economic activation.

Besides this, the Rashtriya Mahila Kosh (RMK, that is, National Credit Fund for Women) and the Department of Women and Child Development have their own programmes under which micro credit is being provided for economic empowerment of the rural poor.

The year 2001 to 02 marked a decade of self-help group-bank linkage programme in India. With the growing importance of the micro-credit through SHG-bank linkage in India, the Reserve Bank of India (RBI) in 1996 included financing to SHGs as a mainstream activity of banks under their priority sector lending.

The government bestowed national priority to the programme through its recognition in the 1999 budget. It has been estimated that India has the world's largest micro-finance programme in terms of out-reach, with 7.8 million households accessing credit through 17,085 branches of the formal banking system under the micro-credit finance programme.

The micro-credit programmes focus on organisation of the rural poor at the grassroots level through a process of social mobilisation, which enables the poor build their own organisations (SHGs) consisting of 10 to 20 persons, in which they participate fully and directly and take decisions on all issues concerning poverty eradication.

SHGs go through various stages of evolution
Group formation: At this stage, groups are formed, developed and strengthened to evolve into self-managed people's organisations at the grassroots level.
Group stabilisation through thrift and credit activity among the members, and building their group corpus - the group takes up internal loaning to the members from the corpus.

Micro credit: The group corpus is supplemented with Revolving Fund sanctioned as cash credit limit by the banks to take livelihood.
Micro enterprise development: Here, the group takes up economic activity, of its choice for income-generation.

Why micro-credit? The limitations of formal financial sector in extending credit to the beneficiaries for assuring employment opportunities led to the evolution of the programme of microcredit with the objective of providing poor timely and hassle-free credit without demanding any collateral.

The harmony among the group members, cohesiveness in the group followed by group pressure in determining repayment schedule and ensuring prompt and faultless repayment, supervision of co-borrower's activities in the system are the important aspects of the micro-credit.

Impact of micro-finance
While the Government of India tries to widen the micro-credit reach for the million poor in India through the self-employment scheme, namely, SGSY, the Nabard envisages reaching banking services to one-third of the very poor in India, that is, a population of about 100 million rural poor through one million SHGs by 2007-08.
With Nabard's support, bank loans were provided to 197,653 new SHGs during 2001-02 and repeat finance was provided to 41,413 existing SHGs during the year. Overall, the Nabard's SHG-bank linkage programme benefited four million families covering an estimated 20 million poor in 2001-02.

The potential of India's micro financing
Micro-finance is an innovative credit delivery mechanism that ensures viable financial services for the needy. It has the potential to address issues like actualising equitable gains from the development on a sustained basis and can play a vital role in developing nations in fighting poverty.

The micro-finance scene in India is dominated by SHG-bank linkage programme. Though the groups existed even before the linkage programme (under the SGSY and Nabard's SHG-bank linkage programme), the banks could not recognise their potential as business clients and both operated independently in most of the cases, without knowing the strength of the other.

Intervening to forge a linkage, besides SGSY, the Nabard has helped in the emergence of a very strong micro-finance movement in the country.
The SHG-bank linkage programme was conceived with the objectives of supplementary credit delivery services for the un-reached poor, building mutual trust and confidence between the bankers and the poor and encouraging banking activity both on thrift as well as credit and sustaining a simple and formal mechanism of banking with the poor.

The linkage programme combines the flexibility, sensitivity and responsiveness of the informal credit system with the technical and administrative capabilities and financial resources of the formal financial sector which rely heavily on collective strength of the poor, closeness of effective social mobilisation functions contributing to an overall empowerment process.

India has a strong potential to promote the women as key decision-makers through encouraged local leadership, which can be facilitated by complete involvement and participation of poor women in micro-credit programmes.
This will succeed only with the coordination among the government, banks, participating members and microcredit finance institutions.

Micro-finance can be a powerful tool in initiating a cyclical process of growth and development. Micro-finance activity can improve the access of rural poor to financial services.

The micro-finance interventions help in inculcating necessary habits for economic independence and self-reliance. Appropriate and participatory credit plans by the members of a group can help in social and economic empowerment.

Increased access signifies the overcoming of isolation of rural women in terms of their access to financial services and denial of credit due to absence of collateral security.

The pool of savings generated out of very small but regular voluntary contributions improves access of the poor women to bank loans,

It could also help in strengthening poor families' resistance to external shocks and reducing dependence on moneylenders.
The group utilises its corpus to disburse loans of small amount amongst the needy members. In the beginning, the members meet out their consumption needs out of their own fund and afterwards they obtain loans from the Banks for taking up some economic activities for their sustained living.

The constraints
The mainstream financial institutions are generally seen as flushed with funds and have access to enormous amounts of low-cost savings deposits. It is found that the poorer the region, the lower the credit-deposit ratio.

Most of eastern Uttar Pradesh, Bihar, Orissa and the North-East regions have credit deposit ratios of 20-30 per cent. Some of the main reasons for the constraints associated with micro credit are:
Non-productive loans and procedural delays for productive loans: Since most of the poor and needy are illiterate and prefer loans for consumption rather than productive purposes, majority of the poor find it hard to get loans sanctioned for taking up economic activities, even if they want to. Sometimes, the loanees are asked to furnish some documents and collateral security against the loan sanctioned, contrary to the directives of the Government and the RBI.

Inflexibility and delay: The rigid systems and procedures for sanctioning loans and disbursing them to the beneficiaries result in a lot of delay in time for the borrowers, which de-motivate them.

High transaction costs: Although the interest rate offered to the borrowers is regulated, the transaction costs in terms of the number of trips to be made, the documents to be furnished etc. plus the illegal charges demanded by the lending institutions clandestinely, result in increasing the cost of borrowing, thus, making it less attractive to the borrowers.

Social obligation, not a business opportunity: Micro-finance has been seen as a social obligation rather than a potential business opportunity.

High interest rates: Sometimes, a few financial institutions charge the beneficiaries of a group high interest rate which makes the repayment difficult for the very poor. The poorest of the poor are, therefore, unable to access the micro-finance benefits.
Lack of training: In most of the cases, it has been found that members of a group take up certain economic activities for their sustenance which are not preceded by relevant training. After the pioneering efforts of the last few years by the government, banks, NGOs, and so on, the micro-finance scene is reaching the take-off point.

An attempt could be initiated to promote a cadre of new generation micro-finance leaders to strengthen the micro-finance institutions (MFIs) to optimise their contribution towards the sector's growth. Thus, with some renewed effort, substantial progress may be made in taking MFIs to the next orbit of significance and sustainability.

This needs close monitoring of the on-going microfinance initiatives, suitable modification or formulation of innovative and forward-looking policies, based on the ground realities of successful MFIs in India. This, combined with a commercial approach from the MFIs in making micro-finance financially sustainable, will make this sector vibrant and help in achieving its single-minded mission of alleviating poverty through providing financial services to the poor.

How are micro finance institutions in India functioning?
As far as the formal financial institutions are concerned, there are Commercial Banks, Housing Finance Institutions (HFIs), NABARD, Rural Development Banks (RDBs), Land Development Banks Land Development Banks and Co-operative Banks (CBs).

As regards the Co-operative Structures, the Urban Co.op Banks (UCB) or Urban Credit Co.op Societies (UCCS) are the two primary co-operative financial institutions operating in the urban areas. There are about 1400 UCBs with over 3400 branches in India having 14 million members, Their total lending outstanding in 1990-91 has been reported at over Rs 80 billion with deposits worth Rs 101 billion.

Similarly there exist about 32000 credit co.op societies with over 15 million members with their total outstanding lending in 1990-91 being Rs 20 billion with deposits of Rs 12 billion.

Few of the UCCS also have external borrowings from the District Central Co.op Banks (DCCBs) at 18-19 percent. The loans given by the UCBs or the UCCS are for short term and unsecured except for few which are secured by personal guarantees, the most effective security being the group or the peer pressure.

The Government has taken several initiatives to strengthen the institutional rural credit system. The rural branch network of commercial banks have been expanded and certain policy prescriptions imposed in order to ensure greater flow of credit to agriculture and other preferred sectors. The commercial banks are required to ensure that 40 percent of total credit is provided to the priority sectors out of which 18percent in the form of direct finance to agriculture and 25 percent to priority sector in favour of weaker sections besides maintaining a credit deposit ratio of 60percent in rural and semi-urban branches. Further the IRDP introduced in 1979 ensures supply of credit and subsidies to weaker section beneficiaries. Although these measures have helped in widening the access of rural households to institutional credit, vast majority of the rural poor have still not been covered. Also, such lending done under the poverty alleviation schemes suffered high repayment defaults and left little sustainable impact on the economic condition of the beneficiaries.

Existing informal financial sources
The informal financial sources generally include funds available from family sources or local money lenders. The local money lenders charge exhorbitant rates, generally ranging from 36 percent to 60 percent interest due to their monopoly in the absence of any other source of credit for non-conventional needs. Chit Funds and Bishis are other forms of credit system operated by groups of people for their mutual benefit which however have their own limitations.

Lately, few of the NGOs engaged in activities related to community mobilisation for their socio-economic development have initiated savings and credit programmes for their target groups. These Community based financial systems (CBFS) can broadly be categorised into two models: Group Based Financial Intermediary and the NGO Linked Financial Intermediary.

Most of the NGOs like SHARAN in Delhi, Federation of Thrift and Credit Association (FTCA) in Hyderabad or SPARC in Bombay have adopted the first model where they initiate the groups and provide the necessary management support. Others like SEWA in Ahmedabad or BARODA CITIZEN's COUNCIL in Baroda pertain to the second model.

The experience of these informal intermediaries shows that although the savings of group members, small in nature do not attract high returns, it is still practised due to security reasons and for getting loans at lower rates compared to that available from money lenders. These are short term loans meant for crisis, consumption and income generation needs of the members. The interest rates on such credit are not subsidised and generally range between 12 to 36 percent. Most of the loans are unsecured. In few cases personal or group guarantees or other collaterals like jewellery is offered as security.

While a census of NGOs in micro-finance is yet to be carried out, there are perhaps 250-300 NGOs, each with 50-100 Self Help Groups (SHG). Few of them, not more than 20-30 NGOs have started forming SHG Federations. There are also agencies which provide bulk funds to the system through NGOs. Thus organisations engaged in micro finance activities in India may be categorised as Wholesalers, NGOs supporting SHG Federations and NGOs directly retailing credit borrowers or groups of borrower.