The Economics and Governance of NGOs Microfinance Issues By Shamsuddin Ahmad

Assessment of Microcredit Services MC now reaches 37% of all households and 60% of poor households 4 large NGOs lend to 76% of all borrowers Significant number of the poorest are MC group members (60% of the members have less than 20 decimals of land.) MC impact on smoothing incomes and reducing HH vulnerability to seasonal and other shocks is of critical importance to the rural poor MC generally reaches the poor, but there are several geographical pockets where MC coverage is relatively low

Assessment of MC Improvements in key social indicators of wellbeing are also associated with MC Measures of female empowerment Children’s schooling, and Health status While MC brought benefits to borrowing HH, these have not been large enough to have had a significant impact on employment creation and growth, and hence the spill-over benefits are limited Limited work on the aggregate poverty reduction impact of MC

Assessment of MC Financial sustainability led to controversy about purportedly high interest rates There is now greater competition in the MC market The comparative under-regulation of microfinance also poses clear risks

Financing of NGOs Government-NGO contracting has not escaped governance problems Successful contracting practices of PKSF should be mainstreamed throughout Government, e.g. Autonomy of the contracting authority Transparent guidelines for selection High rejection rate The newly-established NGO Foundation should adopt and adhere to the best practices. A system of certifying NGOs would help

Financing NGOs Funding sources have diversified since mid-1990s. Donor and PKSF funds are complemented by members’ savings and internally generated funds, which come from Net income from MC operations Surpluses from commercial activities MC operations are cost-efficient relative to international comparators (MIXMarket indicators) Most microfinance programs are financially sustainable generating positive adjusted returns on assets (refer to Table 3.2 in page 44) Profits are used for further expansion of MC and to subsidize access by the poorest

Financing NGOs MC market is not saturated and interest income is likely to grow Bulk of revolving funds are now from savings and MC surpluses. PKSF is an important source of finance but NGOs are exploring ways to reduce dependence on PKSF Access to commercial funds is limited but should be a goal for those with successful programs It will, however, require Credit ratings of MFIs Disclosure and benchmarking of performance indicators Regulatory framework that allows equity investments in microfinance programs

Financing NGOs In future, mature microfinance industry will rely on self-generated funds and market borrowing, e.g., securitization of MC Although a new approach, securitization can become the most popular instrument for raising funds directly from the market CDF linking NGOs to commercial bank financing Regulatory reform and financial accountability improvements will help access commercial funds together with rating or certification

Regulatory Framework for MFIs MFI sector remains comparatively under-regulated in international perspective. Legal framework relating to NGOs is obsolete with over-abundance of laws and agencies with limited capacity. Appropriate appeals procedures and mechanisms for merger and exit of NGOs are also absent Laws relating to internal governance and financial accountability are inadequate. Audit reports are rarely posted in public places

Regulatory Framework The new regulatory framework should maintain or enhance the space given to NGOs to innovate and scale up It should be facilitative; support better corporate governance; strengthen accountability and transparency; take into account the commercial activities of NGOs, defining them as ‘Public Benefit Organizations’; and have a tiered regulatory structure focusing on large deposit-taking institutions It should apply equally to government-owned and operated programs

Future Direction for MC Move to under-served areas. What will it take to get there? Further coverage of ultra-poor segment Expansion of financing micro-enterprises

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