Microfinance and the Triple Bottom Line

The origins of microfinance are found in the community development projects of the 1950s, with microfinance evolving in the past 30 years especially from small-scale community lending programmes, into fairly sophisticated financial operations. One such pioneering programme, which has become a global microfinance success story was the Grameen Bank, the origins of which can be traced back to 1976. At this time Professor Muham-mad Yunus, a Fulbright scholar at Vanderbilt Uni-versity and Professor at University of Chittagong, launched a research project to examine the possibi-lity of designing a credit delivery system to provide banking services targeted to the rural poor in Bang-ladesh, inspired by the Bangladeshi famine of 1974. The Grameen Bank today continues to grow at a rapid pace, with over 2400 branches in over 80,000 villages. Recipient of the Nobel Peace prize in 2006, it developed micro-credit into an ever more important instrument in the struggle against poverty.

As microfinance evolved, “in many developing countries, the characteristics of both microfinance institutions (MFIs) and traditional banks have converged, with the entry of commercial banks into the field, and MFIs acquiring banking licences,” notes Temenos in Globalization of Microfinance. Recent years have seen a growing collaboration between the commercial and microfinance sectors, enabling each to leverage their competitive advantages. For instance, banks have greater access to capital and existing infrastructure, while MFIs are more knowledgeable at the community level.

A report by The Economist states that the majority of the developing world’s population is made up of the growing middle class, rising from one third in 1999 to just under half in 2006. This necessitates cost-effective and secure financial intermediation as an essential ingredient to social development. Thus microfinance must increasingly become an integral component of economic development policies, taking on a broader role than just addressing poverty alleviation as the principal objective. In other words, microfinance banks or providers must be commercially viable in order for the sectoral growth to be sustainable. To this end the micro-finance bank must have a clear vision of how it is going to go about achieving growth and financial sustainability, while clearly delivering the socioeconomic benefits that microfinance generally aims to do.

The authors of this report selected the Tameer Microfinance Bank, to assess how a microfinance bank is pursuing the desired direction. The Bank, incorporated in 2005, today has 30 branches in 14 cities and towns across the country. The customer (borrower) base is about equally divided between rural and urban areas. Eighty percent of the Bank’s rural outlets are in un-banked and disadvantaged geographies, including the coastal archipelago and desert communities. About 81 percent of its customers are new to banking and their account with Tameer is their first banking experience.

Product Diversification in Microfinance

One of the earlier micro-lending tools included group-based lending methodologies, which lent very small amounts of money to a large number of the un-banked. As microfinance evolved in the last two decades and with the entry of new players in the field, MFIs have expanded and diversified their product range to address the unique needs of their various low-income clients. Arguably one of the key contributing factors for the success of microfinance banking is thus the ability to be both flexible and dynamic, dealing as microfinance does, with often unusual needs and circumstances of the borrowers. Tameer Bank too is focusing on product diversifi-cation, in areas such as micro credit, micro savings, micro insurance, micro mortgage, micro leasing and even micro franchising.

50 percent of Tameer’s loans are in the product ‘Emergency loan’, and 50 percent are in the product ‘Karobar loan’, which provides working capital for microfinance entrepreneurs for growing their business units, and provides critical cash flows necessary for keeping micro-sector businesses above the poverty line.

The integration between the commercial and microfinance sectors has also led to the increase in deposits as a source of funding. Due to limited knowledge and a lack of trust beyond their own community, the local poor may be more inclined to make deposits into local savings accounts.

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Microfinance customers seek deposit products that make savings easy and highly profitable for them. In the case of Tameer, product diversification thus also includes saving products, such as the 10 X 10 small deposit product, that offer high profit rates to micro-sector individuals. Targeting the small business sector, this saving product has a ten percent per annum net profit on savings of Rs. 10,000.00, and free accidental insurance of Rs. 100,000.

Another product, the Tameer-e-Zindagi (TZ) programme, is a holistic saving programme starting from saving as little as Rs. 500 a month for a year, to bigger savings of Rs. 5000 for 60 months. TZ is a viable programme as compared to the usual un-structured savings methods used in Pakistan. The Bank in fact offers the highest rates on term deposits in Pakistan, on savings from Rs. 10,000 to Rs. 500,000 or more, for tenures of 3, 6 and 12 months.

A ‘triple bottom line’ approach in poverty
alleviation means expanding services to include the very poor, enabling them to realize their potential and fostering financially self-sufficient microenterprises.

Technology in Microfinance Banking

Technological advancement is a crucial factor in the enhancement of microfinance operations, by making small and simpler banking transactions cost-effective, thus expanding the commercial viability of microfinance banks.

“The four winds of change in microfinance commercialisation, consolidation, competition and regulation – all blow in the same direction. All require a technological and operational platform that reduces operating costs, and therefore interest spreads; can process increased volumes and offer a wider range of services; is credible to regulators and can connect to best available delivery channels in each market,” states Temenos.

Our case study institution, Tameer Bank employs various levels of technology to run its locally developed core banking functionality, made up of the various finance systems that aim to be the best in class. The systems minimize the organi-zation’s overall cost of ownership, especially the high cost of servicing remote locations. Also, they enable increasing service accuracy, instant customer accessibility and turnaround time. Tameer employs the majority of the over 1000 HR resources from microfinance communities of operations, thus creating local employment and instilling community confidence.

The investment in innovation, especially in the areas of technology enables individual lending model development and global best practices based risk management function. This in turn lends support to a constantly evolving, robust and scalable commu-nity banking system that allows the Bank’s customers to start small, yet grow exponentially as the business expands.

Linkages

In order to be effective in poverty alleviation, microfinance credit and savings schemes need to make stronger links between local economies and global economic trends and be linked to wider programmes of women’s empowerment. For-profit microfinance banking means that the organization becomes a not-just-for-profit company, but a lot more, in its responsibility towards the community it operates in. A ‘triple bottom line’ approach in poverty alleviation means expanding services to include the very poor, enabling them to realize their potential and fostering financially self-sufficient microenterprises.

Tameer engages in a wide range of programmes, which directly address poverty and vulnerability, such as training communities on the value of credit and savings, and encouraging people including women to develop an understanding of how to use financial services and solutions.

Some of its programmes and activities include scholarships and loans for students, and setting up of IT labs and learning centers, adult financial literacy, microentrepreneur performance recognition and support, employee performance recognition and support, women’s’ inclusion in banking, finance and trade, CSR partnerships with companies wishing to invest in BOP development, local and international internship programmes/jobs, fishermen and coastal development initiatives, and industrial worker education and development programmes.

Microfinance alone is not a magical solution for bringing the marginalized into mainstream economic activity or for poverty reduction. A strategic approach is needed whereby a host of microfinance solutions is coupled with awareness raising, training, and community-intervention programmes which have a sustainable and wide-reaching impact on communities.

References
The Globalisation of Microfinance. Murray Gardiner, Temenos. September 7, 2009.

http://www.microcapital.org/current-trends-in-microfinance-the-growth-of-commercial-microfinance/

    Author Information

    Zohare Ali Shariff is CEO of Asiatic Public Relations Network Ltd. & Editor-in-Chief of tbl. A graduate of the London School of Economics, he is a published author and winner of National Book Foundation wards. He is based in Karachi.

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