Editorials

by Rajen Kumar

No Escaping Social Media

Running a magazine concentrating on issues of small and medium enterprises and managing with limited resources is a like living life on the edge. In this rush of meeting deadlines,...

Special Reports

Apr 2012

EMRC, Brussels Associates with SME WORLD as its New Media Partner

EMRC has promoted business partnerships with the developing world and has organised dozens of business forums in key decision-making cities, such as Amsterdam, Rome,...

Money

Micro Finance Institution: Banker of MSMEs

Gyan Prakash Agarwal, Secretary General, WASME
Sep 2011

Lack of finance is a major constraint that the Micro, Small and Medium Enterprise (MSMEs) sector faces. MSMEs often encounter higher barriers to external financing than larger firms that limit their growth and development. It is observed that MSMEs have been more likely than larger firms to be denied new loans during a financial crisis. There are several reasons for this, like lack of sufficient guarantee/collateral, difficulties in proving creditworthiness, tiny cash flows, insufficient credit record, poor bank-borrower associations and high operational costs.

A recent World Bank study (SMEs: A Cross Country Analysis with A New Data Set, Policy Research Working Paper, 5538, Jan. 2011) estimates that global volume of MSME finance is around $10 trillion. However seventy percent of this $ 10 trillion MSME finance happens in high-income countries. Sub-Saharan Africa, Middle East and North Africa, and South Asia together account for only 1.7 percent of the total MSME finance volume. And the rest of it happens in East Asia, Asia Pacific, including China.

The business of lending to MSMEs can be a very profitable one. However, MSME clients though do repay loans without fail, formal financial intuitions like commercial banks associate them as high risk category customers .Also, there is a significant gap between demand and supply, which is generally being filled by local money lenders. It is because, traditional lending involves credit assessment through the analysis of various documents, MSMEs often shy away from going through such cumbersome lengthy procedures. Thus, most MSMEs especially those which are at the lower bottom of the enterprise pyramid do not depend on any kind of organized or formal financial players and this is particularly the case with the developing world.

It is in this context that the role and relevance of micro finance institutions (MFIs) come into play. Micro finance movement has become real boon for the MSMEs especially those micro & informal sector enterprises (ISEs) and Poverty Alleviating Enterprises (PAEs). These sections are generally unbanked sectors of enterprise population. It is to be noted that financial inclusion has become an important topic in the development agenda, as there is a direct link between access to credit for MSMEs and economic growth and development. Poor entrepreneurs can achieve their enterprise dreams only with financial inclusion. Here we must note that nearly three billion people in developing countries have little or no access to formal financial services. In Sub-Saharan Africa only 5 to 25 percent of households have a formal relationship with a financial institution. And low levels of financial inclusion are an obstacle to economic development.

Microfinance is undoubtedly the most innovative anti-poverty programme of our times. It can have a far-reaching impact on the lives of the poor and provide necessary impetus for micro enterprises and assist poor people come out of poverty via enterprise/private sector route.

It is estimated that around 10,000 MFIs exist today, serving over 130 million clients impacting the lives of over 700 million individuals across the world.

The first microfinance institutions (MFIs) were non-profit organisations with a social mission to alleviate poverty by helping the poor build up vocational and business management skills. They by giving small, uncollateralized loans for working capital made difference in the lives of poor entrepreneurs. But today, much of that focus has changed as most MFIs started looking for ways to make a profit on the loans by shifting from their status as nonprofit organizations to commercial enterprises. Ever since 2005 this trend is visible. Such micro finance commercial entities needed to raise interest rates and engage in aggressive marketing among the poor to sell their micro finance products. It has several ramifications, for instance, when loans could not create further income generation, wide rate of defaults occur, affecting the long term viability of MFIs. So MFIs should re-orient themselves with a focus on MSME and small business lending in order to be more meaningful.

When Mohammed Yunus gave his first loan to a group of Bangladeshi women in the 1970s, his motive was to lift them out of poverty by way of supporting income generating production activities. With this, many borrowers turned into micro entrepreneurs.

Olga Sorokina, Expert at Russian Micro Finance Centre ,argues that MFIs lending to small businesses is in the best interest of themselves. She says, “Microfinance institutions quickly lend to small business owners on favorable terms to stimulate turnover of a company, and through this provide greater profit not only for an entrepreneur, but also for a MFI.”(World SME News, August 2011, a monthly publication by World Association for Small and Medium Enterprises)

MFIs can contribute much more to MSME sector. MFIs can be the banker of MSMEs. This would not only bring stability to MFI sector but also enable MSME sector access easy and uncollateralized credit that in turn create more employment, income and contribute to economic development.

Mr. Gyan Prakash Agarwal, is Secretary General, World Association for Small and Medium Enterprises (WASME). He is a finance specialist and Chartered Accountant by profession. He can be reached at sg@wasmeinfo.org

1 Comments >>

SK Rao

15 Sep 2011 (02:37:28)

It is a good article. the author has rightly highlighted the point how MFIs can service the banking needs of SMEs. MFIs in India should focus on SMEs rather than focusing on personal financing business...yes that would be a good business proposition for them to tide over their crisis

Our Achievements

Winner of appreciation award for promoting SMEs in India.
1st ever Indian magazine to penetrate tier II, III cities & the rural belt.
Industry Partnerships include CII, FICCI, ASSOCHAM, PHDCC, AIMA, ITPO, SME Network, Federation of Indian Micro Small Enterprises (FISME)
Official Magazine Partners for several national & international MSME events.

The Last Word

More Learned than Educated, You were!

I was speechless. Rather hesitatingly I asked him, “So, what have you decided, Sominder ?” His reply was curt and candid, “I have told the doctors that I don’t want to live life as dumb. Only...

You can also write for SME WORLD

We are looking for writers and experts to contribute original stories and articles. Send an email to smeworld@gmail.com with your story idea and lets get talking.

Some of our valued contributors are...