While micro-financial institutions are key in catering to the financial needs of low-income populace, in Bhutan’s context the cost of fund could lead to issues that could result in even higher interest rates.

From the experience of other countries shared during the second day of international summit on financial inclusion yesterday, the cost of financing increased with sparseness of the population density.

Micro-financial institutions usually borrow from the bigger commercial banks and finance the needs of the unreached populace to help income generation. In the process, to cover the financial and operational cost, the interest rate is often high. Subsidies, and incentives help keep the interest low.  The cost is generally low if the population density is high.

While the Royal Monetary Authority (RMA) has recently come up with rules and regulations on deposit-taking micro-finance institutions and regulations on microloan institutions, the country has other non-government organistions (NGO) functioning as micro-finance institutions.

But, with the new rules and regulations, NGOs functioning as micro-finance institutions must be registered with the central bank and comply by the rules.

The story of Bandhan Bank in India is an example of how an NGO evolved from non-banking financial institution to deposit-taking micro financial institution and it now became a commercial bank that caters to low-income populace.

The chief executive officer of Bandhan Bank, Chandra Shekar Ghosh, said that people in the low-income group bear their emergency financial needs from the business capital financed by the institutions.

For instance, education of their child and health expenditure become an issue later when the borrowers cannot pay back the loan. But since the Bank introduced education and health loan with no interest, social needs are taken care of and the non-performing loans declined by manifolds.

Given the population density in Bhutan, Chandra Shekar Ghosh said that the cost would be on a higher side and comparison should not be made with other countries as long as the commercial banks support the micro financial institutions with viable model.

He added that a good supervision and monitoring framework would support the sustainability of micro financial institutions. “For a micro-financial institution, it is advisable to have one or two simple products covering maximum clients, because multiple products not only confuse the clients but also the employees.”

The chairperson of Sanasa Development Bank of Sri Lanka, Muditha Samadanie Kiriwandeniya, said: “The proliferation of micro-financial institutions has created a myth that micro-financing alone can eradicate poverty.”

She said that it is nice to make people happy but it will not make a community grow and compete in the global market when everyone wants to be an entrepreneur.

She added that it is imperative to get the package right from the beginning and that before looking at the external model it is important to look at the country’s own model. She indicated that the country should be mindful of which industries to promote and to think comprehensively rather than looking at the segmented piece and making people happy.

Sharing Nepal’s perspective, Prakash Raj Sharma, the CEO of Laxmi Laghubitta Bittiya Sanstha Ltd, said that Bhutan should learn from Nepal’s micro-financial institutions because the geography and population density is comparable. Micro-financial institutions, he said, are more concerned about their sustainability even before the operation, and land up charging higher interest rates.

To keep the cost low, he said that digitisation provides alternative delivery channel.

RENEW, started micro-financing in 2011 in partnership with Savings Banks Foundation for International Cooperation, Germany. The project director of RENEW-Microfinance, Bernd Baehr, said their services started where the Bhutan Development Bank’s services stopped.

He said that micro-finance in Bhutan cannot be profitable unless the infrastructure and technology keep up with the pace of development. The field officers, for instance, have to drive six hours on difficult road to reach the clients, resulting in loss of productive time and increased cost.

Bhutan Association of Women Entrepreneurs (BAOWE), another newly registered micro-financial institute, is also aiming to keep its cost low. The organisation already has a scheme to provide financing to street vendors and farmers catering to unbanked citizens.

Although a registered micro-finance institution, BAOWE is still not operational as it is awaiting its proposal to be approved by the largest bank in the country. Damchae Dem, the founder of BAOWE, said that most of the ground works are done by the government.

Panellists from abroad said that many people not included in the formal financial system are construed as not creditworthy. But experiences of successful micro-finance institutions reveal that these sections of the society have the least instance of loan default.

Trust and mentoring, some panellists said, is crucial because no businessman will start a business with the intention to make loss.

Tshering Dorji