MICROFINANCE = POVERTY ALLEVIATION!!!

MICROFINANCING AIDS POVERTY ALLEVIATION


By Cheranka Mendis

The essence of microfinance and its correlation with poverty alleviation was discussed at the inauguration of the international conference on ‘Microfinance for Inclusive Development and Sustainable Growth’, held yesterday at the Centre for Banking Studies, Colombo.

Poverty alleviation in Sri Lanka has been a top priority of governments since Independence itself, said Deputy Governor of Central Bank W.A. Wijewardane, stating that Sri Lanka has achieved a decline in poverty levels from 20% in 2003 to 15% in 2007. “This has been a major feat for Sri Lanka as poverty signifies social harm and impairment. Our top most achievement should be to kill the absolute poverty line in the future,” he said.

The typical strategy to alleviate this was the introduction of a 'safety nets' programme imposed five years ago which nonetheless had notable side effects, said Mr. Wijewardane. “This set out giving outright grants to the underprivileged which did not encourage them to work harder as they got what they need.” Those who obtain the grants got lazy and were discouraged from trying harder to improve their life styles as the basic requirements were met under this scheme, proving that safety nets were not the solution in the long run.

Then came the 'safety rope' scheme advocating microfinance, said Mr. Wijewardane. To attain the best outcome of this service, many key areas should be scrupulously studied he explained. “A good knowledge of the market is essential in conducting worthwhile microfinance,” alleged Mr. Wijewardane.

“Consumer is sovereign in the demand and supply market and if a consumer does not desire a certain good, he or she would not buy the good even if it is given for free. Hence a careful study on the requirement of the consumer should be conducted.”

Even though microfinance would be doomed without the lack of accurate information, consumer preference surveys (which would enable proper information to circulate within the system) come with high cost attached. Mr. Wijewardane asserted that though the cost for such surveys are high for individual firms, if all micro entrepreneurs get together the costs would be far less. “An information bank could then be constructed and information could be given to users for a price,” he said. However the practicality of this suggestion is debatable.

Also, the need for providing proper micro business plans along with knowledge on how to reduce transaction costs are of vital importance to proper management of microfinancing. In addition, releasing loans on due dates and subsidization of credit under the scheme should be considered, he said.

Although the poorest groups have been reached by Microfinance Institutions (MFIs), a noteworthy fraction of their customers appear to be from the non-poor groups i.e. the middle class. “This poses a problem as the middle class people who flock to attain the money use it for nonproductive purposes,” said Mr. Wijewardane.

Addressing the issues related to microfinance and the recession, Director of Center for Banking Studies, Udeni Alawattege stated that many negative aspects would occur during the crisis. “Microfinance which has double objectives for impressive growth with a high degree of resilience could result in many negative setbacks. More pressure will build up on regulatory and financial authorities which could affect many aspects of society.” Thus this would affect the poor more severely than the others.

Microfinance, now one of the widely accepted instruments for poverty alleviation throughout the world, would crumble if the system is mismanaged during this period of crisis. It could be said that the hitherto successful poverty alleviation efforts would collapse in no time if proper management and knowledge is not practiced in the administration of these institutes.

The four day seminar would go on till April 24 and some forty participants including seven delegates from the international community are to take part.
DAILYMIRROR.LK