ARSHAD AJMAL is chairperson and CEO of Al-Khair Cooperative Credit Society Ltd, Patna. In an interview with DR. WAQUAR ANWAR, he dwells in detail upon the various aspects of microfinance and shares his experiences with interest-free microfinance with local deposits which he thinks is technically feasible and financially viable. Excerpts:
What is microfinance?
The first aspect of microfinance is micro credit. This is related to the situation in which the existing banks and financial institutions do not cater to the needs of a huge chunk of the masses as most of them are not bankable. The number of those who are not bankable is very huge. Take the case of Bihar or consider the all India position: 85 per cent of the population is outside the reach of banks. Microfinance is concerned with small size loans depending upon the location. For example, we talk about microfinance in terms of loan of Rs.500. In a small town its upper limit may be Rs.2,000 or more while in a metropolis like Mumbai the limit may be Rs.20,000 or more.
But micro-credit in itself is not complete. Another necessary ingredient of microfinance is micro-deposit. For persons who are not bankable making deposits is also a problem.
Another important aspect relates to creation of wealth as micro-deposit is possible only thereafter. Although it has not been established that microfinance is the sole programme for poverty alleviation but at least it is a very important helping tool. Till date it is understood that microfinance improves the condition of persons above subsistence level. It is not possible for the persons who are below subsistence level to do savings and deposit the same. The persons who are earning Rs.8 a day or less than that cannot save a single pie. One may refer to Arjun Sen Gupta Report which says that 78% of the people in India earn less than Rs.20 a day. Creation of wealth is necessary. And for this micro-enterprise is required.
What are the components of micro-enterprise?
The micro-enterprise component for say a vegetable seller will be that he understands the difference between purchase price and sale price. He should know at least that much arithmetic so that he can understand what is his profit and how to distribute and make use of the profit. He should get right price of the goods he is selling. Suppose a lamp is arranged for him, like carbide lamp or solar lamp, to continue selling after fall of dawn, he will be able to sell for longer hours and get benefits out of this added facility. Similarly, arrangements like convenience of procurement and availability of a place to serve as storage also would be helpful in his expansion. In fact, it is not possible to sustain microfinance system for long without micro-enterprise.
Then there is coverage of loss and other hazards relating to micro-enterprise. In this regard some form of takaful or insurance coverage is required. This is called micro-insurance.
Thus microfinance encompasses four elements namely: micro-credit, micro-deposit, micro-enterprise and micro-insurance.
What is Dr. Yunus model? Are there other models also?
One important purpose of micro-credit in all known models is to encourage habit of saving and depositing the same. A basic weakness of most of the microfinance systems, including that of Dr. Yunus is that they are looking towards outer agencies for providing credit. For example, in India we hear about earmarking funds to feed the needs of microfinance. Alternatively attentions are directed to funds available with multinational agencies. This is simply nothing but financing the funds made available through governmental and non-governmental sources. That is why these are incomplete systems as they cannot ensure their own sustenance.
Does it mean the basic viability of such arrangements is a question mark?
Yes, someone is ready to give fund; another one is ready to disburse the same. It is a mere disbursing agency job. The funding agency, be it governmental or non-governmental, may change its priority. Take the case of current financial crisis that has resulted in liquidity crisis. In such a case allocation of fund for this purpose may not be available. We are hearing the news of the bad impact of the global meltdown and consequent national financial slowdown. Five lakh persons from textile sector became jobless. Now the work to be done is not enterprise but relief work. Relief is not sustainable in itself.
Another problem with that model is the element of interest therein. The interest element is as high as 24 per cent per annum. I do not have any contempt about Dr. Yunus and the work done by him. Almost all models are functioning like this. Even the persons who talk about Islamic microfinance also have the same approach of fund collection from somewhere. What will happen if that source dries up or looks the other way or refuses to extend the assistance? The whole thing would vanish in the thin air. But no viable system can develop in this manner.
Dr. Yunus model is known as Gramin Bank. The Indian practices are called Self Helf Group models, Joint Liability Group models and the models developed by banks and government agencies for directly or through NGOs for providing loans in small amounts. The common feature in all these relates to the security of the loans. There is no physical security of such loans. It is simply social security. This point should be understood very clearly. Sometimes we find that persons engaged in interest-free societies think that they are working in the field of microfinance. The characteristic feature of microfinance is complete absence of any physical collateral.
Is microfinance based only on locally available resources possible?
I am confident both on theoretical frame and practical level that interest-free microfinance with local deposits is technically feasible and financially viable. For example our GDP this year is projected to be forty three lakh crore rupees. The contribution of unorganised sector in this is 65 per cent. This much creation of wealth is done by the sector for which we are talking about providing microfinance. So this sector possesses huge deposits. Here one may refer to the drain theory propounded by Dada Bhai Naorozji whereby the earnings of the masses pass through a drain and are utilised by the few up in the economic echelon. That economically sound populace is in fact not earning all the resources that they are utilising but the wealth created by the toiling populace reaches their coffers through the drain.
Persons who are not contributing significantly in the national GDP are the real beneficiaries of the resources. For example the report that CD ratio of Bihar is poor means that the money collected in Bihar is utilised for financing the projects in places like Mumbai and Gujarat. There is much scope for micro-deposits that can be the basis of the whole system of microfinance encompassing micro-credit, micro-enterprise and micro-insurance.
On practical level we are experimenting in this area for the last seven years under the banner of Al-Khair Cooperative Credit Society in Patna. The results are very encouraging and we submit confidently that microfinance on the basis of local resources is possible. It is technically feasible and financially viable. Micro-deposit is available in the society in abundance. For example, our Phulwari Sharif Branch is working in an area that has approximately 12000 families but our reach till date has been up to only 3000 families. The deposits we are getting from these 3000 families are more than four crore rupees per annum and we are lending solely on the strength of these deposits.
Micro-deposit is available but the question that comes is the financial products and goodwill of the group that is inviting these deposits. I am asserting that microfinance should be done through micro-deposit and by no other extraneous source. One may accept non-local funds to start with or for research and development, or for infrastructure. But it will be wrong to do lending from outside fund, because that will not be a sustainable process in itself.
What is the possibility of promotion of interest-free microfinance?
We all know that profit and loss sharing basis is a replacement of interest. The question that will have to be answered is what financial products will succeed. There is need to evolve through research and development of financial products suitable for this purpose. In terms of microfinance a considerable portion of cash finance is involved. One point that is now accepted is that actual service cost may be recovered on one time basis. This should be understood clearly that the cost of repayment and administering an institution working for finance will have to be borne. Otherwise no economics of financing is possible.
But two aspects are very clear. One is that this service charge cannot be a source of profit. The other is that it should be on actual basis. The actual expenses should be the bare minimum. One cannot justify absorption of exorbitant expenses in the guise of actual expenses. There should be a legal-cum-moral frame to fix the limits of actual expenses. And these expenses should be approved by the same persons whom the institution is lending.
Cooperative model is very useful in this where budget has to be passed by the annual general meeting of the members. This service cost per unit of lending will decrease with the increase of quantum of lending activity and it will stabilise at one level, the optimum level. It may be noted that we in Al Khair Cooperative and Credit Society have done four times downward revision of service charges.
What is your message for social activists in the particular field of activity you are yourself engaged in?
The major approach in India for microfinance is formation of self help groups (SHGs). The problem with SHGs is that they are designed. The rate of collection of funds is very slow. It takes months to collect any meaningful amount. How can one intervene in finance by depositing Rs.10 weekly or monthly? The whole scheme revolves around linking the group with banks. After depositing for six months, linkage with banks becomes possible.
Another problem is that it is trapped under the same bureaucracy. The bureaucracy of banks may be somewhat better than the civil government bureaucracy, but this is also corrupt, inefficient and insensitive. Moreover the linkage with banks is also very poor. In the case of Bihar only 8 per cent of SHGs could be linked to banks. Despite this it is a very good movement whereby people pool their resources on the basis of cooperation. My suggestion is that the activists should encourage formation of SHGs, form an association thereof and convert the same into cooperative societies.
So we are in search of a Kurien in microfinance!
You can call it so, in a way! If the persons who talk about alternative economics including those talking about Islamic economics get themselves in this area with proper understanding of economics and finance, the situation would certainly improve at a fast pace. The potentiality of interest-free microfinance in India is very bright. The Islamists should come forward with broad vision. They should proceed with the idea that the intervention in economics has to be done with indigenous resources alone because the day it is thought it can be done with outside funds will mark the end of the effort, a death knell to the whole idea. We need self sustaining growth and permanent changes.