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Friday, November 23, 2012

The Global Need for Micro Financing & Social Business - Prof Muhammad Yunus

The Global Need for Micro Financing & Social Business - Prof Muhammad Yunus



Microfinance pioneer Muhammad Yunus speaks at the University of Virginia, sharing a central message that in working together we can change the world. Mr. Yunus established Grameen Bank in Bangladesh, reaching out to people traditional banks don't deem creditworthy. Grameen Bank now serves more than 8 million people through 'microloans' totalling about $1 billion a year.
Mr. Yunus received the Nobel Peace Prize in 2006. In August 2009, U.S. President Barack Obama presented him with the Medal of Freedom, the highest civilian honor in the United States.
Muhammad Yunus visited the University of Virginia at the invitation of Gowher Rizvi, a longtime friend. Mr. Rizvi is vice provost for international programs at the University of Virginia.

Muhammad Yunus: Microcredit and social business for a poverty-free world

Microcredit pioneer Muhammad Yunus founded the Grameen Bank in Bangladesh more than 25 years ago. Since then, millions of rural poor — mostly women — have received small loans for self-employment projects that have helped lift their families out of poverty. The bank's model has been replicated in more than 100 countries, and microlending has become an important tool in the fight against global poverty. Canada's International Development Research Centre (IDRC) has worked with Yunus and the Grameen Bank on a number of initiatives linking the use of information and communication technologies to poverty reduction in rural Bangladesh.

Creating A World Without Poverty: Social Business and the Future of Capitalism - Nobel Peace Laureate Muhammad Yunus outlines his vision for a new business model.
(Jan 27, 2009 at Columbia University, School of International and Public Affairs (SIPA))

The event was co-sponsored by Center for the Study of Human Rights, Center for the Humanities, SIPA's Economic & Political Development Concentration, and Committee on Global Thought.

About MicroFinance

What is microfinance?

What is microfinance?

  1. What is microfinance?
  2. What is the difference between microfinance and microcredit?
  3. How is microcredit different from other targeted development lending?
  4. Who are microfinance clients?
  5. How do borrowers use microcredit loans?
  6. What kinds of institutions deliver microfinance?
  7. Do MFIs do other things besides financial services for low-income people?
  8. How does microfinance help the poor?
  9. When is microfinance NOT an appropriate tool?
  10. Why do MFIs charge high interest rates to poor people?
  11. Why does the microfinance industry place so much emphasis on sustainability?
  12. Is the microfinance industry sustainable?
  13. Do governments do a good job of delivering microcredit?
  14. What is the government's role in supporting microfinance?
  15. How do savings services help poor people?
  16. What is the microfinance industry doing to ensure that the poor do not fall prey to predatory lenders?
  17. What is social performance measurement and why is it important for financial institutions?
  18. Where can I find financial performance data on MFIs worldwide?

"Microfinance" is often defined as financial services for poor and low-income clients offered by different types of service providers. In practice, the term is often used more narrowly to refer to loans and other services from providers that identify themselves as "microfinance institutions" (MFIs). These institutions commonly tend to use new methods developed over the last 30 years to deliver very small loans to unsalaried borrowers, taking little or no collateral. These methods include group lending and liability, pre-loan savings requirements, gradually increasing loan sizes, and an implicit guarantee of ready access to future loans if present loans are repaid fully and promptly.
More broadly, microfinance refers to a movement that envisions a world in which low-income households have permanent access to a range of high quality and affordable financial services offered by a range of retail providers to finance  income-producing activities, build assets, stabilize consumption, and protect against risks. These services include savings, credit, insurance, remittances, and payments, and others.

Microcredit refers to very small loans for unsalaried borrowers with little or no collateral, provided by legally registered institutions. Currently, consumer credit provided to salaried workers based on automated credit scoring is usually not included in the definition of microcredit, although this may change.

Microfinance typically refers to a range of financial services including credit, savings, insurance, money transfers, and other financial products provided by different service providers, targeted at poor and low-income people.

3. How is microcredit different from other targeted development lending?

In addition to the new techniques explained in FAQ #1, the microcredit approach has tried to avoid the pitfalls of an earlier generation of targeted development lending. The approach focuses on fostering better repayment discipline and charging interest rates that cover the costs of credit delivery, both of which support development of sustainable institutions that can continue to expand their services in the future.

4. Who are microfinance clients?

Typical microfinance clients are poor and low-income people that do not have access to other formal financial institutions. Microfinance clients are often self-employed, household-based entrepreneurs. Their diverse "microenterprises" include small retail shops, street vending, artisanal manufacture, and service provision. In rural areas, microentrepreneurs often have small income-generating activities such as food processing and trade; some but far from all are farmers.
Hard data on the poverty status of clients is limited, but tends to suggest that most microfinance clients fall near the poverty line, both above and below. Households in the poorest 10% of the population, including the destitute, are not traditional microcredit clients because they lack stable cash flows to repay loans. Most clients below the poverty line are in the upper half of the poor. It is clear, however, that some MFIs can serve clients at the higher end of the bottom half. Women often comprise the majority of clients.
Over the past decade, some financial institutions have started developing a range of products to meet the needs of other clients, including pensioners and salaried workers. Although little is known about the universe of potential clients, the number of households without effective access to financial services is enormous.

5. How do borrowers use microcredit loans?

Many microcredit borrowers have microenterprises—unsalaried, informal income-generating activities. However, microloans may not predominantly be used to start or finance microenterprises. Scattered research suggests that only half or less of loan proceeds are used for business purposes. The remainder supports a wide range of household cash management needs, including stabilizing consumption and spreading out large, lumpy cash needs like education fees, medical expenses, or lifecycle events such as weddings and funerals.

6. What kinds of institutions deliver microfinance?

Most MFIs started as not-for-profit organizations like NGOs (non-governmental organizations), credit unions and other financial cooperatives, and state-owned development and postal savings banks. An increasing number of MFIs are now organized as for-profit entities, often because it is a requirement to obtaining a license from banking authorities to offer savings services. For-profit MFIs may be organized as non-bank financial institutions (NBFIs), commercial banks that specialize in microfinance, or microfinance departments of full-service banks.

7. Do MFIs do other things besides financial services for low-income people?

Some MFIs provide non-financial products, such as business development or health services. Commercial and government-owned banks that offer microfinance services are frequently referred to as MFIs, even though only a portion of their assets may be committed to financial services to the poor.

8. How does microfinance help the poor?

The impact of microcredit has been studied more than the impact of other forms of microfinance. Microcredit can provide a range of benefits that poor households highly value including long-term increases in income and consumption. A harsh aspect of poverty is that income is often irregular and undependable. Access to credit helps the poor to smooth cash flows and avoid periods where access to food, clothing, shelter, or education is lost. Credit can make it easier to manage shocks like sickness of a wage earner, theft, or natural disasters. The poor use credit to build assets such as buying land, which gives them future security. Women participants in microcredit programs often experience important self-empowerment.
Empirical studies on the impact of credit are difficult and expensive to conduct and pose special methodological problems. Most impact studies to date have found significant benefits from microcredit. However, only a few studies have made serious efforts to compensate for the methodological challenges. In fact, many studies would not be regarded as meaningful by most professional econometricians. A new wave of randomized control trials are now in process, which should yield a more definitive picture.
Even so, there is a strong indication from borrowers that microcredit improves their lives. They faithfully repay their loans even when the only compelling reason is to ensure continued access to the service in the future.
Other microfinance services like savings, insurance, and money transfers have developed more recently, and there is less empirical research on their impact. Client demand indicates that poor people value such services. MFIs that offer good voluntary savings services typically attract far more savers than borrowers.

Financial services, particularly credit, are not appropriate for all people at all times. For loans that will be used for business purposes, microcredit best serves those who have identified an economic opportunity and can capitalize on it if they have access to a small amount of ready cash. Regardless of how loans are used, MFIs can provide long-term, stable credit access only when clients have both the willingness and ability to meet scheduled loan repayments.
Microfinance is particularly inappropriate for the destitute, who may need grants or other public resources to improve their economic situation. Grants are a more efficient way to transfer resources to the destitute than are loans that many will not be unable to repay. Too much risk is placed on the MFI and client, when the only way a client can repay a loan is by starting a successful business. Basic requirements like food, shelter, and employment are often more urgently needed than financial services and should be appropriately funded by government and donor subsidies.
Governments and development agencies often use microfinance as a tool to address socio-economic problems such as relocation of refugees from civil strife, generating employment among demilitarized soldiers, or assistance following a natural disaster. Microfinance may or may not be able to respond to these situations effectively, and certainly not as a stand-alone intervention. Implementing a successful microfinance program to address these types of situations depends upon a number of factors, the most important of which is a client base capable of making regular repayments.

Concerns often arise as to why microcredit interest rates are higher than the bank interest rates that wealthier people pay. The issue is cost: the administrative cost of making tiny loans is much higher in percentage terms than the cost of making a large loan. It takes a lot less staff time to make a single loan of $100,000 than 1,000 loans of $100 each. Besides loan size, other factors can make microcredit more expensive to deliver. Credit decisions for borrowers who have neither collateral nor a salary cannot be based on automated scoring. These decisions require substantial intervention of a loan officer in judging the risk of each loan. MFIs may operate in areas that are remote or have low population density, making lending more expensive. This is often why traditional banks tend to stay away from such areas. If an MFI wants to operate sustainably, it has to price its loans high enough to cover all its costs.
Although microcredit interest rates can be legitimately high, inefficient operations can make them higher than necessary. As the microcredit market matures in a given country, administrative costs usually drop as managers learn from experience and in some cases because competition forces lower pricing and greater efficiency.

11. Why does the microfinance industry place so much emphasis on sustainability?   

From a development perspective, financial sustainability is not an end in itself. Rather, it is a tool for reaching the maximum number of clients. MFIs may only operate for a limited time, reach a limited number of clients, or be driven more by political goals than by client needs if services are not priced at sustainable levels.
Donors and governments cannot likely provide enough subsidized funds to meet the huge demand for microfinance. Even if there were enough donor and government money, it would be better spent on other development priorities that, unlike microfinance, cannot be delivered without continuing subsidies. Sustainable MFIs have the potential to attract non-subsidized resources to finance expansion of outreach. Experience has even shown that borrowers are more likely to repay lenders who operate without subsidies at they are more confident the institution will be around to give them future loans.
The trade-off between financial viability and reaching very poor people is much less acute than many once thought. A number of financial providers have managed to offer high-quality financial services to very poor people while also covering their costs. Moreover, correlation between MFI profitability and client poverty level has proven to be a statistically weak one. This may be more driven by the vision of particular MFIs than by any inherent unprofitability of low-end microcredit.

12. Is the microfinance industry sustainable?

Is the microfinance industry financially sustainable—is it profitable after making adjustments for subsidies not likely to continue in the future? Most MFIs are still unprofitable, especially if one includes the many small MFIs that do not report to the international databases described in FAQ #17. A more meaningful way to look at profitability is to consider the overall number of overall clients served by profitable MFIs, rather than the number of profitable MFIs themselves. In 2006, 44% of all microborrowers captured by the MIX database (see FAQ #17) are being served by profitable institutions. If one narrows the focus to private MFIs such as NGOs and licensed institutions, then more than 3/5 of the borrowers are already being served profitably, and the long- term trend is upward.
Are MFIs as profitable as banks? Measured by return on assets, MFIs are on average more profitable than the commercial banks in their countries. This does not show that microfinance is inherently more profitable than commercial banking. Rather, the differential is likely due to microfinance being an immature industry in most countries where providers' profits have not yet been squeezed down. Measured by return on the equity invested by shareholders, MFIs are on the average less profitable than banks, but this is mainly because MFIs are not yet as fully leveraged as banks—i.e., MFIs fund their assets with more of their own money and less of the money deposited by savers. Even so, well-managed microfinance have already shown to be profitable enough to integrate into mainstream financial sectors.

13. Do governments do a good job of delivering microcredit?

There are several highly successful government MFIs, such as Bank Rakyat Indonesia's microfinance department. However, the vast majority government microfinance programs do a poor job of delivering retail credit. Such programs are usually subject to political influence, high default, continuing drain on national treasuries, and sometimes lending based more on the borrowers' influence than their actual qualifications. Among government programs reporting to international databases, only 1/8 of clients are being served sustainably. There are structural dynamics that make it hard for governments to deliver good retail credit. Sound credit administration requires screening out borrowers who are not likely to repay, charging interest rates high enough to cover costs, and responding vigorously to late payments. These requirements usually run counter to the practical incentives and imperatives of even the sincerest working politician. The government-run MFIs that deliver good microcredit tend to be insulated from politics, managed by technocrats, and strongly and explicitly focus on sustainability.
It is important to remember that these incentive problems for government providers pertain more to credit than to other services. For instance, good government savings banks are considerably easier to find than good government retail loan programs.

14. What is the government's role in supporting microfinance?

Government's most important role is not provision of retail credit services, for reasons mentioned in FAQ #12. Government can contribute most effectively by:
  • Setting sound macroeconomic policy that provides stability and low inflation
  • Avoiding interest rate ceilings - when governments set interest rate limits, political factors usually result in limits that are too low to permit sustainable delivery of credit that involves high administrative costs—such as tiny loans for poor people. Such ceilings often have the announced intention of protecting the poor, but are more likely to choke off the supply of credit
  • Adjusting bank regulation to facilitate deposit taking by solid MFIs, once the country has experience with sustainable microfinance delivery,
  • Creating government wholesale funds to support retail MFIs if funds can be insulated from politics, and they can hire and protect strong technical management and avoid disbursement pressure that force fund to support unpromising MFIs.

15. How do savings services help poor people?

Savings has been called the "forgotten half of microfinance." Most poor people now use informal mechanisms to save because they lack access to good formal deposit services,. They may tuck cash under the mattress, buy animals or jewelry that can be sold off later, or stockpile inventory or building materials. These savings methods tend to be risky—cash can be stolen, animals can get sick, and neighbors can run off. Often they are illiquid as well – one cannot sell just the cow's leg when one needs a small amount of cash. Poor people want secure, convenient deposit services that allow for small balances and easy access to funds. MFIs that offer good savings services usually attract far more savers than borrowers.

16. What is the microfinance industry doing to ensure that the poor do not fall prey to predatory lenders?

Many countries are concerned about the impact of excessive interest rates, abusive lending practices, and over-indebtedness on poor borrowers. Quite a few players in the industry are now focusing on consumer protection issues. Typical consumer protection measures include disclosure requirements, rules and prohibitions related to lending practices, mechanisms for handling complaints or disputes, and consumer education.
The ACCION International/ MicroFinance Network "Pro-Consumer Pledge," FINCA's "Consumer-Oriented Ethical Statement" and Freedom from Hunger's "Statement on Ethical Treatment of Clients" are examples of network organizations articulating pro-consumer principles. The SEEP Network, through its Pro-Client Working Group, has resources on the subject.
Even in countries where consumer abuse is not yet a problem, promoting voluntary consumer protection codes and practices may reduce future pressure to over-regulate. An increasing number of individual MFIs are adopting voluntary pledges or codes that promote effective consumer protection and a consumer-oriented culture. For instance, the Bosnian MFI Prizma has worked with Freedom from Hunger to articulate "Our Commitment to Clients."
Investors are in the process of signing on to CGAP's Investor Initiative for Client Protection in Microfinance. Finally, the slow but steady inroads of social performance measurement and management (FAQ #15) into the field of microfinance is focusing more attention on protection and transparency dimensions, as well as potential unintended negative consequences for clients.

17. What is social performance measurement and why is it important for financial institutions?

The Social Performance Task Force defines social performance as: "The effective translation of an institution's social mission into practice in line with accepted social values that relate to serving larger numbers of poor and excluded people; improving the quality and appropriateness of financial services; creating benefits for clients; and improving social responsibility of an MFI."
Most MFIs have a social mission that they see as more basic than their financial objective, or at least co-equal with it. There is a great deal of truth in the adage that institutions manage what they measure. Social performance measurement helps MFIs and their stakeholders focus on their social goals and judge how well they are meeting them. Social indicators are often less straightforward to measure, and less commonly used than financial indicators that have been developed over centuries. Today's increasing use of social measures reflects an awareness that good financial performance by an MFI does not automatically guarantee client interests are being appropriately advanced.

18. Where can I find financial performance data on MFIs worldwide?

Increasing numbers of MFIs report their performance to international databases each year. The
MIX Market is the primary source for this information, containing financial and other performance data from almost 2,000 MFIs collected and processed by the Microfinance Information eXchange (MIX). Data for participating MFIs, including client outreach measures, simplified financial statements, and a number of standard financial performance indicators, is publicly available on their website. 
The MIX also publishes MIX Microfinance World, featuring country, regional and global analyses based on the MIX Market database, such as benchmarking reports; and the MicroBanking Bulletin, a periodic publication covering a variety of topics including financial reporting, social performance, transparency, policy & regulation, and investment. 
The Microcredit Summit Campaign collects outreach data annually from hundreds of MFIs around the world. Summary information is published annually and the State of the Campaign reports can be found on their website.

CURRENT SITUATION OF MICROFINANCE IN MALAYSIA AND ITS ISSUES

 
  BY: ILIAS AHMAD
AGRICULTURE BANK OF MALAYSIA
Kuala Lumpur
 
 
1.    INTRODUCTION
Microfinance is nothing new in Malaysia. It has been operated by credit unions, co-operative banks and specialised credit windows of banks.  Microfinance services of financial credit range for about RM10,000 (USD2,631) and mostly to finance small businesses, agricultural loans and loans for poverty reduction.
Majlis Amanah Rakyat (MARA), council of trust to the Bumiputera and Credit Guarantee Corporation (CGC) are some of the pioneers to introduce microfinance loans to its borrowers.
The rural credit institutions comprising of Agriculture Bank of Malaysia (BPM), Farmers Organisation Authority (LPP), Federal Land Development Authority (FELDA), and agro-based Co-operative Societies provide micro credit for the agriculture sectors.
There are a number of non-government organisations (NGOs) that engaged in microfinance. These include Yayasan Usaha Maju operating in Sabah, Koperasi Kredit Rakyat in Selangor and the best and significantly known microfinance institution (MFI) is Amanah Ikhtiar Malaysia (AIM).
Most recently, under the economic package announced by the Government on May 21, 2003 to generate economic activities by mobilising domestic sources of growth while reducing the country dependence on the external sector, Agriculture Bank of Malaysia (BPM) is given the allocation of RM500 million (USD 132 million) and National Savings Bank (BSN), the allocation of RM300 million (USD79 million) to carry out their respective micro credit programmes. The loan programmes aim of giving loans to individuals and small enterprises who do not qualify for existing bank products due to the lack of good collateral/guarantors.  The loans are given based on the projects cashflow.
 
2.    OVERVIEW OF MICROFINANCE
The meaning of microfinance with the narrower version refers to giving tiny loans to the hard core poor at subsidised interest rate (Grameen Bank, donation seeking non-profit organisation). A broader version has evolved with revolutionary approach to development finance with the provision of financial services such as credit, savings, insurance, money transfer to poor and low income households and their micro-enterprises.
Microfinance around the world shows that poor people with little education are reliable borrowers. They will invest wisely and are willing to save if given the chance.  Experience has shown that women are the best borrowers and are better at repaying their loans.
Microfinance was initially offered by different kind of institutions, informal and traditional systems, local and international NGOs funded by donors, cooperatives and credit unions, local government institutions, specialised financial institutions and ultimately by regulated, formal commercial financial institutions.
 
3.    MICROFINANCE OF AIM
3.1    AIM
Amanah Ikhtiar Malaysia (AIM) was established in September 1987 to institutionalise an action research project carried out by the Centre for Policy Research of University Science Malaysia (USM), sponsored by the Asia and Pacific Development Centre (APDC), Islamic Economic Development Foundation of Malaysia (YPEIM) and the Selangor State Government. With some modification from the Grameen Bank model, the Ikhtiar Project was adopted as a programme to eradicate poverty of the rural poor in Malaysia.
AIM is governed by its Board of Trustee who will meet at least twice a year. A Management Committee will be responsible for its daily operation.  The Management Committee, chaired by the Managing director shall meet at least once every quarter.
 
3.2    OBJECTIVES OF AIM
The objectives of AIM is to give out benevolent loans to finance income generating activities to the poor households and eventually move out from the poverty group. It is complementary to the Government objective in eradicating poverty amongst the poor households in Malaysia.
 
3.3    SOURCES OF FUNDS
AIM operational costs are borne through its administrative charges to its borrowers, state government, federal government, banks and financial institution and the private sectors.
 
Table 1: SOURCES OF OPERATIONAL COSTS &
REVOLVING LOAN CAPITAL
ON-LENDING FUND
AMOUNT
Government-free interest loan
RM300.0 million (USD78.9 M)
Government-grant
RM18.2 million (USD4.9 M)
Financial institutions – soft loan
RM28.05 million (USD7.4 M)

Government Agencies

 
LKIM – free interest loan
RM4.0 million (USD1.05 M)
Rural Development Ministry - grant
RM12.8 million (USD3.4 M)

Grants for Operational Costs

 
Federal and States Government
RM30.0 million (USD7.9 M)
 
3.4    AIM CONCEPT AND STRATEGIES
The concept of AIM is to create out of the hardcore poor households, highly motivated individuals who are committed to earn an honest living and eventually move out of the poverty level.
The strategies are by giving out to borrowers interest free loans to undertake income generating projects. The loans are to be repaid on a weekly basis.  Once fully paid, bigger loans are being offered. This process goes on as the need arises. The first loan is normally restricted to RM1,000 (USD263) up to a maximum of RM4,000 (USD1,289) for successive loan. Successful borrowers could apply for a much bigger loans of RM5,000 (USD1,315) or even up to RM10,000 (USD2,2631).
Following the model of the Grameen Bank, poor borrowers formed themselves into groups of five who in turn guaranteed each others loans. These households will undergo a one week compulsory training of one hour per day to understand their rights and obligations in order to ensure good repayment.

3.5    AIM LOANS PROGRAMMES
Currently AIM offers the following loan products to its members:
(i)    Ikhtiar Loan Scheme 1 (Skim Pembiayaan Ikhtiar 1 – SPI 1)
SPI 1 provides loans to poor households with average monthly income of not more than RM340 (USD89) or two third of poverty line income.  Initial loans are up for a maximum of RM1,000 (USD263), increasing to RM2,000 (USD526), RM3,000 (USD789), RM4,000 (USD1,052) and RM4,900 (USD1,289).  The loan repayment period is between 50 weeks to 100 weeks.
(ii)    Ikhtiar Loan Scheme 2 (Skim pembiayaan Ikhtiar 2 – SPI 2)
SPI 2 loan scheme provides loans between RM5,000 (USD1,315) to RM9,900 (USD2,605) to borrowers who have made good repayment from the previous two loans and having a monthly income exceeding RM600 (USD158). The repayment period of the loan is between 50 to 150 weeks.
(iii)    Ikhtiar Loan Scheme 3 (Skim Pembiyaan Ikhtiar 3 – SPI 3)
SPI 3 provides loans up to RM10,000 (USD2,631) to borrowers with good track recor with perfect repayment for at least 2 times (SPI 1) or SPI 2 and having a monthly income exceeding RM1,000 (USD263).  The loan could be repaid up to a maximum period of 150 weeks.
(iv)    Single Mother Loan Scheme (Skim Ibu Tunggal - SKIT)
SKIT provides loans to single mothers living in town areas.  The aims of the scheme are to increase the living standard of single mothers and motivate them to undertake stable economic activities to support the family.  Eligibility for the loans depends on the household earnings and varies within states.  Household earnings for those living in Kuala Lumpur and Johore must not exceed RM1,200 (USD315); Selangor, Malacca and Negeri Sembilan RM800 (USD210) per month; Kelantan, Terengganu and Kedah RM425 (USD111) per month; and Perak RM600 (USD157) per month.
In addition, special Education loan Scheme up to RM1,000 (USD263) with maximum loan period up to 50 weeks, and special housing Loan Scheme up to RM5,000 (USD1,315) with maximum repayment period up to 100 weeks are available to borrowers with good repayment record. As at August 2003, AIM has an outstanding loans balance of about RM130 million (USD 34.2 million).  From its inception in 1987, the loan programmes have benefitted more than 120,000 members. The existing members now stands at about 89,000. Based on the figures of 150,000 (two-third) of poor households targeted by AIM, it has successfully made an outreach of about 80 percent in term of the number of poor households it has targeted in Malaysia.

3.6    BASIS FOR AN EFFECTIVE AND EFFICIENT PROGRAMMES
(i)    Exclusive Focus on The Very Poor
AIM uses special means test to identify eligibility of its potential clients.  It is based on conditions of the house and monthly households income of not more than USD66 (1986-1994), USD75 (1995-2000) and USD90 (2001).  Priority of AIM loans will be given to the poorest among the poor.
(ii)    Specialised Delivery System
AIM has set up requirements to ensure that the poor has access to the credit programmes. These requirements are:
(a)    Suitable loan condition (no collateral, no guarantor and no legal action)
(b)    Credit is taken to the very poor, to their village
(c)    Simple procedures, compulsory group training and oral test on understanding of rules and regulations
(d)    Formation of groups by potential members (five members in a group, equal socio-economic status, create right peer pressure and peer support)
(e)    Collective responsibility, group and centre accept collective responsibility
(f)    Small loan and weekly repayment
(g)    Loan for income generation
(h)    Close supervision by field staff in centre meeting and loan monitoring
(i)    Availability of subsequent loan
(j)    Open conduct of all business at centre meeting.
 
(iii)    Rigorous Practical Staff Training
Efficient and effective operational staff are required to deliver a well done job.  Rigorous and practical training are conducted with a basic training for six months and a probation period of 12 months.  The training period is divided into three phases and trainees must pass each phase before being offered as AIM probation staff.  All staff must have good understanding of AIM rules and procedures.
 
(iv)    Supportive National Policy Framework
AIM has the support from the federal government and also from the state government.  Grants and soft loans are given to support its operational and administrative costs.  AIM also has close linkages with government agencies and they have been supporting its branches and regional offices by organising together programmes and workshops for its members and their families.
 
3.7    PERFORMANCE
(i)    Disbursement
Table 2:  NUMBERS AND AMOUNT FINANCE (1998-2002)
 
1998
1999
2000
2001
2002
Number
42,668
39,600
46,451
55,067
57,290
Amount (RM)
102,685,700
82,980,990
107,247,260
128,126,650
140,712,480
Sahabat Members
56,557
60,815
69,017
79,492
87,438
The number of loans being disbursed ranges from RM102.6 million in 1998, decreasing to RM82.9 million in 1999 and with an upward trend up to 2002 amounted to RM140.7 million.  Sahabat members increased nearly double from 1998 to 2002. From its inception, AIM has a cumulative disbursement of more than RM800.0 million (USD210.5 million) loans to its members.
 
(ii)    Collection
AIM still has an overall good collection rate of about 96% (2001: 96.5%, 2002: 95.5%, August 2003: 95.3%) from its loan programmes.  The set-back was due to the Single Mother Loan Scheme (SKIT) which contribute to its poor performance of collection of about 36% and also from fisherman Loan Scheme.
(iii)    Loans Arrears
As at August 2003 AIM has a cumulative loans arrears of about RM13.8 million (USD3.6 million) which contributed to about 9.4% from its total loans of about RM146.2 million (USD38.5 million).
 
4.    MICRO CREDIT OF AGRICULTURE BANK OF MALAYSIA (BPM)
BPM has launched its Micro Credit Scheme (Pembiayaan Kredit Mikro) on the 3rd June 2003 after the announcement of the economic package by the Prime Minister on 21 May 2003.  The scheme starts with an initial capital injection of RM200 million from the government and will be increased to RM500 million when the fund for the scheme has been finally raised.
The scheme is offered to small entrepreneurs in agriculture related projects in production, processing and marketing.  Loan size is up to a maximum of RM20,000 (USD5,263) with an interest rate of 4% per annum and loan period of not more than 4 years.  The applications from the public is very encouraging.  Up to October 2003, RM188.6 million (USD49.6 million) has been disbursed to the borrowers with a loan balance of RM174.1 million (USD45.8 million).  It is still early to measure the performance of the scheme, although the collection rate that has been achieved to date is about 92%.

5.    ISSUES
For AIM;
(i)    AIM still depends on the support from the government and related agencies for funding.  With a fixed administrative charge of 4%, it does not cover its operating costs and could not be sustainable and self-dependent.
(ii)    John D. Conroy (2002) commented on his articles that AIM should relooked back from its fundamental principles because of the loss of direction not focusing on the not so poor or non poor and giving larger loans and better-off borrowers. With the recent management shakeout it is hopeful AIM will be succeeded by a period of stability and recovery.
(iii)    As the number of poor households decreases, due to various government's effort to reduce the poverty level to 0.5 percent in 2005, the outreach to new members will be scarced.  Potential expansion of growth would be in the state of Sabah and Sarawak which have shown a higher poverty level.
 
For BPM;
(i)    The extension of loans with low interest rate (4%) will become an issue if the fund is not supported by grant or soft loan from the government.  If BPM has to outsource its funding from the market, the government should be willing to come out with the differential margin for BPM to extend loans with low interest rate.
(ii)    Implementation of micro credit will put more burden in term of operational costs to BPM.  The scheme will increase credit risks due to its relax condition of no collateral/guarantors.
 
6.    CONCLUSION
The official policy of subsidising of microfinance was appropriate in circumstances of Malaysia.  It would still be appropriate given the relatively small number of hardcore poor and the poor outside the financial sector getting access to credit and financial services.  AIM has made a great success in reaching the poorest of the poor complementary to the government effort to eradicate poverty. For BPM its too early to make any judgement from the micro credit scheme that has been launched.
The future of microfinance institutions in Malaysia to survive will depend on whether they could be sustainable and dependent. It would be possible for microfinance institutions in Malaysia becoming financially sustainable if they could improve their administrative and operational capacity, increase the availability of capital on-lending and extending loans with competitive market rate.
 
REFERENCES
1.    Conroy,J.D. 2002. Microfinance in Malaysia: Time to rebuild
2.    Gibbons,D.S and J.W. Meehan. 2002. Financing Microfinance for Poverty Reduction.
3.    Siwar,Chamhuri. 1996. Microfinance Capacity Assessment Study. The Malaysian Case. Asian Pacific Development Centre, Kuala Lumpur
4.    ADB.2000a. Finance for The poor: Microfinance Development Strategy. Manila: Asian Development Bank.