Micro credit (finance): Facts and fallacies

Perhaps, micro credit to some and micro finance to others is the term used, misused and abused in many recent discourses on economic recovery following the COVID-19 pandemic. 

Policymakers, practitioners, economists, researchers, analysts, think tanks, banks, financial institutions, journalists, chambers, and INGOs are among the discussants. They explain and argue the importance of micro credit in alleviating poverty, uplifting micro, small and medium enterprises (MSMEs), and empowering women (as if they are not already) for the purpose of enhancing the contribution, employment and social welfare status of the low-income category of the population.  

MSMEs indeed play a major role in most economies, both developed and developing in the creation of jobs and reduction of unemployment. Thus, they contribute to national income, employment, productivity and entrepreneur development.

Observing the vistas
The agencies and individuals involved in promoting, facilitating and providing “Micro Credit”, turn around the term in many dimensions to see the vistas of it. Some say it is not Micro Credit but Micro Finance; some are worried about its nature; others discuss types, composition, with or without collateral, which should or can best deliver, the role of the Government, Central Bank, banks and financial institutions, and NGOs, for what purpose, at which interest rate and so on. According to them the MSMEs and lower-income categories are badly in need of financial assistance and to be more specific, extended credit facilities on concessionary terms. 

Several discussants beat the number of potential beneficiaries. The banks and financial institutions have, on the other hand, come out with a series of concessionary credit schemes under names never heard. They claim to be the first, to be the highest, to be providing the best terms, to be the most convenient, to be the easiest access, and to be leading in assisting MSMEs and low-income category. 

The credit they claim for their contribution in providing financial assistance to this category is much higher than the volume of credit they provided. If one analyses the schemes and statistics provided by banks and financial institutions and the figures published by the Central Bank (CBSL), no more financial need of this category is left unmet. 

Banks, financial institutions, CBSL, policymakers and the Government happily talks of their achievements and success in providing credit facilities to low-income categories. But, the intended beneficiaries are not happy. Why?

The answer lies in the following advertisement published by one of the benevolent banks in a daily paper. This depicts how a Micro Finance recipient begins and ends his/her entrepreneurship.

 “Whereas Mr./ Ms.………………has made default in payment due  …………………on the development loan facility extended and the Board of Directors of……………….Bank ………., do hereby resolve that the property and the premises ……………………….mortgaged …………………..be sold by Public Auction ……………………for the recovery of the said sum………………………….”

As students of Economics, we learned of 4 factors of production namely Land, Labor, Capital and Entrepreneurship. An entrepreneur is a person who takes a risk and combines the other 3 factors of production - land, labour, and capital - to earn a profit. The most successful entrepreneurs are innovators who find new ways to produce goods and services or who develop new types of goods and services to bring to market. 

Entrepreneurs are a vital engine of economic growth helping to build the largest firms in the world as well as the small businesses in our neighborhood. The payment to entrepreneurship is profit. Most MSMEs and low-income category enterprises in Sri Lanka are not making profits. The explanation lies in the lack of entrepreneurship. Only a fraction of MSMEs and low-income category are Entrepreneurs.  

Misconception
To our policymakers, CBSL, banks, donors, project staff, NGOs and many others, each and every individual in the low-income category who starts up a business or a production is an entrepreneur. In their eyes, the only issue faced is the shortage of capital. This is a misconception. The issue is not lack of capital but the absence of entrepreneurship. When the Government, a bank, an NGO or any other financier extends credit facilities and financial packages, MSMEs are mushrooming. But rarely found an entrepreneur among them. 
Majority in the low-income category have access to land. It is the land inherited, gifted, transferred, titled, leased or encroached. They have their family labor. Two vital factors of production, land and labor are available free. The opportunity cost of these factors is not reflective in their cost calculation. 

Earnings minus payment of interest are profit for them. So they are in business. But do not sustain long. Then they seek for concessionary financing. They pay the interest and capital installments during the initial period and then only the interest and then nothing. Then they resort to distress financing. This is the saga of many low-income category entrepreneurs.  Banks and financial institutions have no mechanism to assess the project viability and the entrepreneurship of the borrower. They go by the cash flow statement and the collateral. They are worried about the repayment.  

Poor eligibility criteria
The eligibility criteria for microfinance is being poor, being in the low-income category, being a small businessman and being a woman. It is true that a poor individual who was carrying a box of ointments on his head and wandering on his foot has built up an empire. It does not mean that every man who carries a box on his head would end up as a business tycoon. 
Women are indeed honest, do not take alcohol, do not smoke, do not gamble, do not misuse funds and repay the loan promptly. They are all good deeds but do not mean that every woman is a successful entrepreneur. 

Those in the categories mentioned above deserve a decent livelihood. But it does not mean that they all can become successful entrepreneurs and are eligible for microfinance. But those who promote facilitate and provide microfinance, believe these good deeds as eligible criteria. They have failed to identify potential eligible entrepreneurs and promising projects for microcredit. This is reflected in the frequent failure of many micro small-medium 
business ventures. 

They cannot resist and survive the vagaries of climate change; they are not capable of identifying a product, quantity, standards, design, market needs, market size, regularity, and timing; they lack knowledge, information, technology and more the entrepreneurship. This is good breeding grounds for our policymakers and all other microfinance lovers. 

The lucky guy who manages and has the patience to undergo all the harassment involved in microfinance will get the facility and copy the neighbor. This is why you see many retailers, poultry producers and pumpkin growers around; suppliers/producers surpass the buyers. Competition among producers will end up with crashing of some if not all and with disputes or as the latest trend with a death.

When we travel outstations, we identify some places with particular products such as pottery, lace, silverware, cane, handicrafts, cotton products and coir products. Most of these products are not chosen but inherited by tradition coming over generations. Access to information, technology, design, packaging, market is denied to the low-income categories. They, therefore, go by tradition, what is familiar to them for generations, what is produced by neighbor, what is promoted by extension workers etc. They are not competent in identifying the right product for his enterprise. They produce but do not find a market for their products. For them, famous Say’s Law “Supply creates its own demand” is valid. Say’s Law was promulgated by J B Say, the French Economist in the 18th Century but rejected long before. These types of producers are the so-called eligible borrowers for microfinance providers. 

From time-to-time the government, Central Bank, a particular ministry, a donor-funded project or an NGO comes out with a package of financial assistance for the benefit of MSMEs and low-income category. This category includes cultivators (peasants and farmers include), home gardeners, smallholders, self-employed, micro, small-medium entrepreneurs, and beneficiaries covered by poverty alleviation programmes. 

They all display similar characteristics and face similar issues. They all line up and come out with a project seeking financial assistance. Policymakers and others involved in micro-credit provide consultancy, counseling, advice, instructions, guidelines to this category of beneficiaries on wiser use of financial assistance. 

Financial needs of this category take a multiple nature. It may be individual, family, social or business need or a mixture of several. They seek financial assistance for a project but use to meet any or all of these needs. Their project never existed or existed but not survived. They wait for another project or a scheme to appear to secure financial assistance and they succeed and settle the encumbrances remaining from the previous scheme.

Losing foreign-funded projects
Being blessed by reaching middle-income level by statistics rather than by performance, the country has lost access to foreign-funded projects. But, the country is blessed by frequent elections which come with many packages of new schemes to assist MSMEs and low-income category and write off existing burdens. 

We, benefactors, preach this category of beneficiaries on wiser use of financial assistance they receive. We are the people who involve in preparation of National Budget or the Ministry Budget leaving handling of the family budget in good hands of our wives. We are the people who wisely use some financial benefits entitled to us. 

For instance, we are entitled to obtain a distress loan. We take it to settle the medical bills of our “ailing grandfather” who has left us many years ago. We use the money and buy a good sound system. We are unable to make ends meet with the remainder of the salary after deduction of interest and the loan installment. We go for a second distress loan to meet the funeral expenses of the same grandfather. We don’t offer merits to our late grandfather. We are rolling before the sound system, while the grandfather would be rolling in his grave. 

Failure to identify viable product
Low-income category entrepreneurs including MSMEs do not have the capacity, access and information to identify a viable product. The product in demand, quantity, quality, standards, volume, price, regularity, timing, access to market, new ideas and technology, knowledge, skills and skills development, designs, packing and packaging (presentation), market needs are essential ingredients to identify the right product. 

One would say why not? Google provides all such information. Of course, Google provides but our prospective clients do not receive. It is due to non-availability of power, internet facilities, computers, IT knowledge, and language barriers. The use of obsolete or inappropriate technology results in low productivity, low quality, and high rate of rejection, higher costs and a reduction in market competitiveness.

Successive governments since independence have introduced many schemes, institutions, programmes, projects and officers with the mandate to assist, advise, train, disseminate, share, demonstrate, and promote MSMEs and raise the economic status of low-income category. 

There are armies of advisors, extension officers, technical officers, development officers and field officers. Yes, the personnel are present but the service is absent. There are departments, agencies, boards, projects to provide information and advice on plants, planting materials, planting techniques. But their presence on the ground is absent. 

We have Research institutions for almost every crop. They are in air-conditioned rooms with IT facilities and access to the latest knowledge. They can claim the credit for having the lowest productivity in respective crops.

While the countries started plantation after Sri Lanka enjoy higher productivity in tea, rubber, coconut, field crops, spices we take the pride for our historical achievements. We have failed to improve the cost efficiency, standards, timing to suit the market. Most of the agencies walk with the producer up to the harvest and leave him high and dry. Because marketing is outside their perimeter. 

Activists, policymakers, practitioners, academics, donors, NGOs, project managers including Prof. Yunus think that lower-income categories have land and labour, but do not have capital. But what they do not have is entrepreneurship. Every poor man or each MSME is not an entrepreneur. This is why most of them fail. Professor Muhammad Yunus who is widely known as ‘Banker to the poor” established the Grameen Bank in Bangladesh in 1983, fueled by the belief that credit is a fundamental human right. Grameen Bank is treated as the model for microcredit. He received the 2006 Nobel Peace Prize for founding Grameen. But, critics say that this model has actually created a debt trap for some of the poor it tried to help. There were also isolated reports that lenders had repeatedly harassed borrowers, and that some of those who had defaulted had been forced to sell their organs to pay back the loans.

Lack of coordination among facilitating agencies
Low-income categories and MSMEs encounter many issues as described above. This is due to lethargy, and lack of coordination among supporting and facilitating agencies in the field. Each agency is working in isolation. They do not communicate, consult and deliver one single message. 

They confuse rather than facilitating. MSMEs and low-income category entrepreneurs do not have access to supporting agencies such as ITI, IDB, and National Design Center. These agencies have survived for decades; they have been conducting research; presented papers in Conferences; conducted fairs and exhibitions; awarded certificates and cups for the best entrepreneurs; they have built up modern facilities and new buildings for themselves; promoted their officers; have been exposed in a foreign land; Directors have become Directors General. They celebrate their mere existence with anniversary events at public expenditure. But, the impact made on the ground is nil or little. Intended beneficiaries of their services are not even aware of the very existence of them.

Every successive government has provided employment to graduates as Development Officers. This move has elevated unemployed graduates to underemployed graduates. But, the livelihoods, earnings and the living standards of the low-income categories have not been elevated.

Officers, researchers, policymakers, bankers, lenders go by poverty line. Those who are below the poverty line are poor and in the low-income category and eligible for microfinance. Economists and policymakers look at the poverty line calculated by statisticians and boast that poverty has come down to 4 percent of the population. But they fail to look at the waistline of the people living in the periphery. That will say ratio of the poor is 
40 percent. 
(Chandrasena Maliyadde has served as Secretary to three Ministries before retirement. He is currently a Vice President of Sri Lanka Economic Association and a University Council Member. He can be reached via [email protected])