05th December 2009, www.lankabusinessonline.com, By W A Wijewardena
A good policy should carry with it six qualifications. The policy should be simple, consistent, efficient, cost-effective, free from unintended consequences and sustainable.Hence, any policy thrust that is to be pursued should satisfy these qualifications. This applies to the policy on microfinance as well.Policies are implemented by numerous branches of a bureaucracy. Therefore, unless the policy is simple, there could be implementation errors that could tarnish the efficacy of the policy.
The consistency in the policy will help the authorities to avoid policy deviations that will work against the results achieved through the implementation of the policy.
The efficiency of a policy requires that the results of the policy should be obtained with the lowest cost.
The cost – effectiveness requires that a policy intervention should be able to recover its costs. Unless a policy is cost – effective, it becomes burdensome, unviable and short – lived.
A policy is an intervention in the market and it is intended to make certain changes in the system, behaviour of people and goals of the society. These results are specific to the policy. But, if it brings about consequences which are not intended, then the policy is said to be a net loser. Hence, a policy should eliminate the unintended consequences or keep them at a minimum.
The sustainability of the policy is the most important, since the policy interventions cannot be continued by authorities indefinitely.
Hence, sustainability requires that, after the withdrawal of the intervention, the policy should have the capability to continue on its own.
High Economic Growth to Couple with MicorfinanceWhy should a country have a microfinance arm, in addition to the other types of finance, small, medium and large? That is because the countries desirous of bringing down the poverty to acceptable levels should necessarily pursue a poor – focussed approach and that approach is basically provided by microfinance.
This does not mean that microfinance is the only effective way to alleviate poverty. The effective way to alleviate poverty is to have a high economic growth, usually above 8 percent per annum, continuously for a long period. This high growth, fuelled by expanding enterprise by the private sector to a large extent and by the state sector to a lesser extent, will create job opportunities for the poor and allow the wealth created to trickle down to the low income groups.
The countries like Singapore, Malaysia, South Korea and Hong Kong have tackled the abject poverty in their respective countries over the last quarter of the twentieth century or so through this approach.
Rapid Growth is the First Choice for Poverty AlleviationSo, the first choice available for a policy maker to alleviate poverty is to have policies to accelerate economic growth consistently and continuously. The high economic growth will enable the poor to seek employment, improve their conditions gradually and become responsible members of the society.
However, even in this policy regime, there are certain members of the poor who have innate enterprising skills in them, wish to become entrepreneurs by themselves and could play a decisive role in the free market system. To bring these people forward and allow them to rise as entrepreneurs, microfinance plays an important role.
The Role of Microfinance is to Integrate the Poor with the MarketThen, the question that arises is what should be the role of microfinance. Its implicit and explicit role should be to integrate the poor to the free market economy system and allow them to benefit from the expansion in economic activities, trading and wealth creation.
In the open market economy, not everyone can play the game with same vigour, rigor and enterprise. Those who have better information, can act more quickly and can make inferences correctly out of the information available are the winners in a market. The others, though it is a lamentable experience, have to accept defeat.
The poor will participate in the game with a deficiency attached to them right at the beginning. They have no access to better market information. They cannot act quickly in the face of an oncoming disaster. Their ability to make inferences correctly out of what they have learnt is defective. Hence, it is inevitable that if they participate in the game, they would surely lose.
These defects inherent with the poor make it necessary that their capacity has to be enhanced before they are thrown into the market arena. This becomes a gigantic challenge for any policy maker in microfinance.
The Capacity of the Poor to be Enhanced through LearningAncient philosophers have identified six essential characteristics of a good learner and they are equally applicable to the poor as well. These characteristics require a learner to have faith in what he learns, show willingness and have ability to learn, be able to understand what is learnt, retain what is learnt, have time for reflecting on what is learnt and finally possess capacity to make inferences out of what is learnt. The learning programmes should inculcate these characteristics in the poor in order to make them good learners.
Adult Learning is Different from Ordinary LearningThe delivery of the learning programme to the poor should essentially take the form of adult training, because the poor who participate in the microfinance activities are all adults. The distinguishing feature of an adult is that he already possesses knowledge and is in a position to share it with others, provided the trainer has used the correct method to extract knowledge from him.
Unlike learned persons who depend on knowledge stored outside the body like books or the cyber space, the poor keeps his knowledge stored in the body, known as the somatic knowledge. In the learning programme, it is this knowledge that is tapped for the benefit of all those who participate in the learning programme.
Microfinance is, therefore, a portent medium for poverty alleviation, provided the capacity of the poor is enhanced through a learning programme suitable for adults.
The Efficiency and Cost – Effectiveness IssuesThe policy makers on microfinance are also concerned about the efficiency and the cost-effectiveness of the programmes.
The maintenance of efficiency will enable the policy makers to attain the best results by incurring the lowest cost. It, therefore, generates the maximum surplus for the society. If a microfinance intervention is not efficient, its contribution to the society is minimal, even though it may have generated a surplus. Economists call this a situation of attaining ‘x-inefficiency’, because the society is not on the production possibility frontier or the top level of production. It would be below the frontier and, therefore, using the resources allocated for the intervention inefficiently.
The cost – effectiveness is similar to the efficiency issue, but it requires the microfinance intervention to be attained with a justifiable cost. If more than one rupee has to be spent in order to deliver one rupee’s worth of microfinance services, such a programme is not viable. Further, the programme should be able to fully cover the costs. If this does not happen, it becomes necessary for someone else to bear the loss and such subsidies cannot be made available indefinitely to keep the programmes going.
The Danger of Unintended ConsequencesA possible unintended consequence of microfinance intervention is the development of a subsidy dependent culture among the poor. The objective of microfinance is to help the poor to unleash their hidden potential and become enterprising so that they would be able to cross the poverty line on their own. It requires dedication, hard work and sacrifice on the part of the poor who would participate in a microfinance programme. This is not easy, pleasurable or comforting. That is why it is necessary to socially mobilise the poor and develop their capacity, before they are engaged in a successful poverty alleviation programme.
Human beings always seek to live in a comfort zone. This is equally applicable to the poor as well. They should be assisted, but at the same time, they should feel that it is they who have to rise and walk along the difficult path to reach the final salvation. The task of the policy maker is to give them hope, a safety net and finally a safety rope. Hope is necessary to keep them going along the difficult path. Safety nets have to be laid in order to prevent them from falling into abysses in the face of adverse shocks coming from outside. The role of the safety ropes are to help them to climb up to safety once they have fallen onto a safety net and are unable to get out on their own.
In other words, any successful microfinance programme is an exaction of the hidden talents and potential of the poor for their own benefit.
The Sustainability IssuesThe initial microfinance intervention is done at a cost to the policy maker. This cost which is a necessary ingredient in a microfinance programme is a subsidy given by a donor or a sponsor who have an interest in helping the poor to cross the poverty line and become useful members of the society.
However, the donor or the sponsor cannot provide this subsidy indefinitely and has to withdraw from the programme at an appropriate time. At that time, the programme should have gained the capability of continuing its work on its own. If it could do so, it is sustainable. Otherwise, it is not.
The goal of the policy maker should be to make any microfinance intervention sustainable through a mixture of appropriate policies, norms, principles and values.
Several factors that are added to a microfinance intervention will ensure the programme’s sustainability.
First, the capacity of the poor should be developed in order for them to stand on their own feet without depending on the external assistance.
Second, the subsidy element that is provided during the initial phase should restricted and time – lined. The participating poor should know in advance that it would be withdrawn on an appointed date and thereafter, the poor will have to look after themselves.
Third, the possibility for moral hazard practices or adverse selection should be eliminated in all aspects of microfinance interventions. This requires non – subsidised credit, time – restricted assistance and competition among the microfinance institutions.
Fourth, microfinance industry should develop an effective self – regulatory mechanism which could be supplemented by the introduction of good behaviour practices, benchmarks, norms and values for microfinance practitioners.
Concluding RemarksMicrofinance is not a panacea for the ills of poverty. A more effective poverty alleviation method is to have a rapid and continuous high economic growth in a country. When an economy grows, it also demands a high level of entrepreneurship from its citizens.
Microfinance can meet this demand by helping the poor to unleash their hidden talents and potential in entrepreneurship.
The aim of the initiative is to raise awareness among migrant worker families on meaningful financial management and investment, they hope to economically empower rural Sri Lankans who seek foreign employment through financial inclusion. Migrant workers are given assistance in setting financial goals through special training programs and thereafter guidance and support to achieve same.
"The aim of doing this project is Economic Prosperity for Rural Poor through Remittances Disbursed via Lanka ORIX Finance" says, Mr. Brindley de Zylva, Managing Director/CEO.
Similarly, the company has linked with LOLC Micro Credit Company Ltd to offer micro loans for income generating activities to reduce the dependence on remittances and ensure a source of sustainable income hastening the return journey of the migrant worker.
