Mubashir Mukhtar

Mubashir, please attach some references and links to works of interest regarding this controversey.

From: Analysis of Microfinance Demand in China, Prof. He Guangwen, Feb. ‘08

In 2006, the World Bank published the CGAP research report “Access for All: Building Inclusive Financial Systems”by Brigit Helms which advocated the construction of an inclusive financial sector in order to allow the entire society, especially middle and low income earners, to enjoy access to financial services. The report emphasized the significance of building inclusive financial sectors at the micro, meso and macro levels. This approach quickly received popular acceptance.

In the beginning of 2008, the World Bank issued a second report, “Finance for All? Policies and Pitfalls in Expanding Access”(World Bank, 2008). The report focused on the issues of financing channels, measuring indicators and the analysis of the determinant factors of access to financial services, both from the perspective of corporations and individual households. The report expounded the role that access to financial services has in economic growth, equity, and poverty alleviation. In addition the report discussed the role of government in promoting outreach of financial services and made a number of policy recommendations. The World Bank aims to promote the construction of perfectly inclusive financial sectors.

From: Access for All: Building Inclusive Financial Systems”by Brigit Helms, 2006, the World Bank published the CGAP research report.

(The concept of ENJOY!!) CGAP envisions a world in which poor people everywhere enjoy the permanent access to a range of financial services that are delivered by different financial service providers through a variety of convenient delivery channels. It is a world where poor and low-income people in developing countries are not viewed as marginal but, rather, as central and legitimate clients of their countries’ financial systems. In other words, this vision is about inclusive financial systems, which are the only way to reach large numbers of poor and low-income people.

My analysis: Has the advancement in the field of finance brought with it Enjoyment for the mankind? Ease in any way? I don’t think so… The world ever distorted and the financial collapse is the evidence. (Not commenting on Islamic financial system as it is also facing a test in dubai, sukuk crisis). The ENJOYMENT reflects upon the CONSUMPTION ADDICTION, the worldly motive…Enjoy in the world as you like concept!

From: “Finance for All? Policies and Pitfalls in Expanding Access” (World Bank, 2008)

Thirty years after the establishment of Grameen Bank, the microfinance movement has attained a certain maturity. Microfinance increases access to financial services for those participating in the program, and, because of lower staff salaries and lack of posh banking halls, it does so at lower operating costs than commercial banks can. Nonetheless, most microfinance programs still incur high unit costs because of the small size of loans. As a result, a large proportion of the institutions—albeit mostly the smaller ones—are dependent on subsidies (Robinson 2001; Armendáriz de Aghion and Morduch 2005), and there is a continuing discussion about the financial sustainability of microcredit, regarding both its feasibility and desirability. Cull, Demirgüç-Kunt, and Morduch (2007) looked at a sample of 124 MFIs in 49 countries representing around 50 percent of all microfinance clients around the globe, most likely, the more profitable and cost-efficient institutions. The authors find that even in this select group, only half of the institutions were profitable and financially self-sustainable, generating sufficient revenue to cover their costs.

At the same time, as MFIs grow and mature, they seem to focus less on the poor (Cull, Demirgüç-Kunt, and Morduch 2007), which could be interpreted either as a success story for their borrowers or as mission drift.

Many MFIs, even with subsidies, have had trouble reaching the very poor. And, as mentioned, some MFIs have been moving upscale with their successful clients. Should policymakers worry about an apparent drift in the emphasis of many MFIs, and of the MFI industry as a whole, away from focusing on credit access for the very poor? Considering the indications that improving access for not-so-poor entrepreneurial households can have powerfully favorable indirect implications for the poor, such worries may be overstated. Focusing on finance for the very poor shifts the attention to subsidies and charity, which can hurt the quality of services. There are also good political economy reasons why the focus should not be on the poor or on how microfinance can be made more viable, but instead on how financial services can be made available for all.21 The poor lack the political clout to demand better services, and subsidies may spoil the credit culture, that is, the willingness to repay loans since they are perceived as grants. Defining the issue more broadly to include the middle class, who often also lack access, would make it more likely that policy makers would make financial access a priority. Hence shifting the focus to building inclusive financial systems and improving access for all underserved groups is likely to have greater impact on development outcomes. As a result, the development community has shifted its attention to building inclusive financial systems focusing not only on specialized microcredit institutions, but on an array of other financial institutions, such as postal savings banks, consumer credit institutions, and, most important, the banking system. This broader approach can lead to overall financial system efficiency and outreach to the whole population.

Further, payment services can be seen as a network good whose benefits increase as a larger proportion of the population has access to and uses them (Claessens and others 2003). Third, subsidies should focus on overcoming the barriers to access rather than distorting prices, such as interest rates. Finally, technological advances have the potential to revolutionize access for the poor, shifting attention from subsidies to establishing an environment conducive to technological innovations that may help overcome many of the restrictions. However, these technological advances, such as m-finance, also pose important regulatory questions.

The simple point is that access to finance is lacking not only for the poor but for vast portions of the population in many low-income economies. If attempts to ensure that the poor do get credit result in distorting subsidies that damage the incentives for the microfinance industry, and the financial sector more generally, to innovate in providing access for the non poor, then their net effect on the poor could be counterproductive.

My analysis: If only half of the select sample of MFI is covering its cost and being sustainable then how come is this huge industry being vigorously promoted?? Couldn’t see the profit motive behind it… it seems to include the huge population of mankind in the FACTORIES…factories of worldly life only. Mobile money is the (M-PESA or EASY PAISA) superb technology for this induction process. Seems to overcome the paper money to electronic money as the M-PESA in Africa is immensely used for small transactions e.g. paying taxi rent. On the other hand if the motive of microfinancing is for poverty reduction then why not supplying with subsidies (in Islamic terms Sadaqaat and Zakat etc) and more emphasis on keeping the interest rate high for sustainability issue.

Rightly said in the same book “21. Rajan (2006b) argues “let’s not kill the microfinance movement with kindness. If we want it to become more than a fad . . . it has to follow the clear and unsentimental path of adding value and making money. On that path lies the possibility of a true and large-scale escape from poverty.”” And this also reflects the same “Third, subsidies should focus on overcoming the barriers to access rather than distorting prices, such as interest rates.”

From: Rajan, Raghuram. 2006b. “Separate and Unequal.” Finance and Development 43 (1): 56–57. (A quarterly magazine of IMF)

Instead of focusing on microcredit for the poor, we should make financial services available to all

It’s costly for financial institutions to deal with the poor. Accepting a $1 deposit costs as much as accepting one of $1,000. It thus makes sense to allow financial institutions to charge the poor higher rates. But governments often impose "usury" ceilings on the rates financial institutions can charge, shutting out the very people these laws are ostensibly meant to help.

Has the microcredit revolution succeeded in its goals? Clearly, more poor people have access to finance. What is less clear is the extent of subsidy involved in extending this access to them. Group lending is very cost intensive and involves the time of both the loan officer and the group. If group lending involves subsidies, is that the best way to spend those subsidies? Also, nontraditional microfinance tends to distance participants from the more formal financial system. This isn't a problem unless the microfinance system doesn't grow fast enough and can't transfer successful participants to the formal system.

How can microfinance be made more viable? Asking this question relegates financial services for the poor to a separate and unequal existence. Instead, we should ask how we can make financial services available to all. If we focus just on finance for the very poor, the thinking immediately shifts to subsidies and charity, which hurts the quality of service. Not only do the poor lack the collective voice to demand better services, but government money can spoil the credit culture. As one participant in a women's credit cooperative said, "We don't default now because we would be defaulting on our sisters' money. If we took money from the government, default rates would go up because we would all feel we were defaulting only on the government."

In truth, in many poor countries, the middle class also has limited access to finance. The same mechanisms that will expand their access will often expand access for the very poor as well. By defining the problem more broadly to include the middle class, we can enlist a powerful supporter in the common fight for access. In the process, the links between the formal and informal financial systems will strengthen, allowing the poor to migrate upward.

What needs to be done? For one, the government should encourage the creation of infrastructure that can allow technology to bring down transaction costs. Giving every individual a national identification number and creating credit registries where lenders share information about their clients' repayment records can be enormously valuable. All borrowers would then have an asset—their future access to credit—that they implicitly offer as collateral when they obtain a loan. The government should also reduce the costs of registering or repossessing collateral, as well as eliminate usury laws. Recognizing, though, that the poor can fall prey to unscrupulous operators, the government should improve consumer protection laws and services.

In sum, then, let's not kill the microfinance movement with kindness. If we want it to become more than a fad, a temporary cause for the glitterati, it has to follow the clear and unsentimental path of adding value and making money. On that path lies the possibility of a true, and large-scale, escape from poverty.

Raghuram Rajan is Economic Counsellor and Director of the IMF's Research Department

My analysis: Tickle down concept had already been refuted (many of your articles clearly show it). The proposal for national identification number, creating credit registries, ease in future access to credit shows significant contribution for induction in the factories! The consumer protection law…by removing the usury ceilings… by imposing higher rates of interest for covering the cost incurred…last but not least “transfer the successful participants to the formal system” What all this leads to? The same motive that Friedman built ‘The Social Responsibility of Business is to increase its Profits” and can more likely be said as “Business in the Name of Welfare” or “Microfinance: Stakeholders or Stockholders?”