Even well-managed,
profitable micro-finance institutions (MFIs) find their
growth constrained by lack of capital, without which
they are unable to leverage from banks the large amounts
of funds required for on-lending to the poor. CASHPOR
Financial & Technical Service (CFTS) in Uttar Pradesh,
India, is working with ICICI Bank, a local commercial
bank, in a potential breakthrough collaboration which
could significantly reduce this constraint.
Microcredit is a business, but it is a business with
an overriding social concern: the reduction of poverty.
Businesses need capital to grow. But private investors
are not keen to invest in microcredit; they don’t
yet see it as potentially profitable, hence the capital
constraint in the industry. The capital constraint
is going to prevent many non-governmental MFIs from
establishing sustainable formal financial institutions
and it is going to prevent those that are formed from,
making a significant impact on poverty in Asia.
This is why the collaboration with ICICI Bank could
prove to be so important. A new company has been registered-CASHPOR
Micro Credit (CMC)-that is collaborating with ICICI
Bank in Chandauli District, eastern Uttar Pradesh,
with the dual objectives of breaking-even financially
within four years and providing nearly 50,000 households
below the poverty line with micro-finance services.
CFTS will provide the social intermediation, assist
with the financial intermediation and charge an upfront
administrative fee of 5%. ICICI Bank will provide
the loan funds and take the risk on the loans. A memorandum
of understanding for the initial four-year collaboration
has been signed and work commenced in April 2003.
CMC, which is an adaptation of the CASHPOR fast-track
approach that was developed in Mirzapur, is expected
to be fully-staffed and operational by the end of
June 2003.
Joint collaborations like this one, may be the answer
to reducing the capital constraint. If instead of
trying to establish their own formal financial institutions
or transforming themselves into such an institution,
non-governmental MFIs can collaborate with banks to
provide micro-finance to large numbers of poor households,
then significant poverty reduction could be achieved.
The collaboration being proposed above between NGOs
and banks would be an ongoing one, with the NGOs aggregating
loan proposals, delivering them to the nearest branch
of the bank, receiving a single check from the bank
and breaking it into small checks to be disbursed
to members of the village groups.
Such collaboration eliminates capital requirements
for leveraging on-lending funds because they are provided
by the collaborating bank. Also they reduce working
capital needs, as no loan loss provision needs to
be made by the MFI. Significant reduction of the capital
constraint to growth in the micro-finance industry
should make possible the provision of micro finance
services to many more poor women throughout Asia.
