Mr. W. A. Wijewardena(left) and Mr.U.P. Allawattage, Director, Centre for Banking Studies, CB. |
An increasing interest in microfinancing might prove to be vital to poverty alleviation in Sri Lanka due to its good fundamentals, greater outreach and sustainability.
It has gained core attention in the global finance system amidst the current financial turmoil as it has proved to have a high degree of resilience for such financial shocks.
According to the Deputy Governor of the Central Bank (CB) W.A. Wijewardena, delivering the inaugural address in Colombo at an International Seminar on Microfinance for inclusive development and sustainable growth, poverty alleviation in Sri Lanka remains a top priority throughout successive governments. He said poverty has dropped to 15% in 2007 from 28% in 2003, describing it as a ‘great success’ but leaves room for greater improvement. Poverty could impose problems for social cohesiveness and therefore must remain a priority.
Mr. Wijewardena said microfinance is a potent instrument in poverty alleviation in that the government’s strategy is that attainment of high economic growth over a long period of time will trickle down to all segments of society. He cited Malaysia and South Korea as being successes in microfinance where poverty levels 30 years ago were as high as 50% but dropped to around 6% at the start of the millennium. Microfinance is generally considered as one of the most effective and flexible strategies of ensuring that a vast majority of the poor have permanent access to an appropriate range of high quality financial services including credit, savings, insurance, fund transfers and other financial services in order to facilitate their income producing activities, build an appropriate asset base, stabilize consumption and protect against risk. Such access is expected to have a positive impact on helping the poor out of poverty and facilitates in enhancing the capabilities of entrepreneurial poor with little or not collateral to access the conventional banking industry.
Mr. Wijewardena said safety nets such as outright grants to poor people to meet their food requirements which were used five decades ago do not work in the long run. There is no incentive for people to move out of the safety net when their food requirements are being met without them having to work. This is referred to by economists as the ‘moral hazard problem’ which is not a new phenomenon but has been around for some time.
Thus came the era of microfinance for the poor to cross the poverty line. This alone is still not sufficient, Mr. Wijewardena said. Funding is only one aspect of micro-business because it also requires a good knowledge of markets where goods and servics should always meet the needs of consumers. Without accurate market research and information, micro-businesses are doomed to fail. He suggested that micro-entrepreneurs should compile market research information in a bank to be provided at a price.
Mr. Wijewardena added that micro-businesses also require business plans with estimates of cash flows and market sales which should be put in a generally acceptable format which will be accepted by banks. However, some micro-businesses do not have the skills to lay out such plans. A project was created by the CB which outsourced the function of business development consultants for a fee. The ‘fee based business consultants’ programme was successful and some even went on to start their own businesses.
Microfinance institutions should keep transaction costs to a minimum and provide on-time delivery of microfinance loans. Mr. Wijewardena said a lot of micro-businesses revolve around agriculture where keeping schedules is essential. He added that there needs to also be credit on simple terms at zero transaction costs. Subsidized credit ‘goes to the wrong people’, he stated.
The International Seminar on Microfinance was held from April 20 to 24 with local and foreign participants from India, Indonesia and Bangladesh. |
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