Micro Credit – Empowerment and Challenges – A Srilankan Perspective

Preface

In the modern era, where technology, access to information and delivery of goods and services are enablers for sustained growth, availability and distribution of financial resources is the key to economic success.  While governments strive to translate plans into action, traditional usage of Banks, predominantly public sector, as vehicles for distributing financial instruments through rural outreach programs, questions remain whether the goals have been met.  It is a known fact that in developed countries, the so-called schemes end up more as populist measures than as growth enablers.

As it stands today, the role of Financial Institutions, namely Government-funded Banks, Private Banks, NBFC’s and home grown, localized money lending business vie with one another to evolve a sustainable business model.

In this context, the role of Micro Finance companies attracting experienced entrepreneurial talent, technology ready with access to both funds and markets is the key to contemporary financial inclusion.

About the Author

Rajeshware Srinivasan, an ex-Banker with around 20 years of experience is presently Senior Business Analyst with Habile Technologies Pvt Ltd., a Chennai based tech startup.  Rajeshware works closely with Microfinance sector and financial innovations across the globe in designing and developing Financial Delivery, Management and Compliance tools.

About Ms. Renuka Rathnahewage

Ms. Renuka Rathnahewage, who started her journey back in 2015 to help people achieve their dreams. Ms Renuka, founder, and CEO of Sejaya Micro Credit Ltd (a microfinance company) aims to improve the financial conditions and reduce the poverty issues faced by financially weak people by providing financial services to them. With extensive experience in microfinance, she is now representing her firm in the Lankan Microfinance Practitioner Association(LMF). 

Dialogue with Ms. Renuka Rathnahewage

1. Origins of Micro Finance in Sri Lanka

With the thrust for Financial Inclusion and opening of the markets, mainly three types of Institutions ventured into distribution of the instruments

  • Financial institutions- Financial institutions are commonly known as Non-Banking Finance Companies who deal with deposits, loans and investment
  • MFI- Micro financial institutions fall under the category of financial services that mainly aim to provide loans to small businesses and people who can’t take the help of banks.  
  • Banks lend to MFI and thus participate in MFI lending- Banks and big Financial Institutions who lend to MFIs and indirectly participate in the funding process mainly to contribute to the Financial Inclusion drive, diversify their portfolio and take advantage of the margins.  

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2. Looking back – Turbulence in the past

With the Governments driving the policies, the big players who were till now unable to penetrate the market tried to use this opportunity and the demand potential.   The industry met with the following situations

  • Pre lending checks on credit worthiness checks was not easy to perform as the target population didn’t have organized financial track record
  • The industry was also in the toddling stages and hence driving the Group Loan concept was met with challenges
  • Breaking the traditional system and establishing the benefits of a microfinance over private lender was a tough nut to crack.  The advantage of better rates by using the group commitment was not understood by the target customers.

Since the target population changed, the existing lending process wasn’t robust enough to handle these changes.  The lack of experience and expertise initially tends to catch up as markets mature and start to absorb the flaws in the system

3. MFI is not as yet regulated

Customer protection taking a back step and as the bad debts accumulated, weighing heavy on the economy,  the Regulatory authorities, Finance Ministry and the Government started to review the situation to put the derailed system back in order.  The result of which was the Debt Relief Program (run by the government in Sri Lanka) to reduce the High NPA.   Such programs have both positive and negative effect on the system.   A team of industry experts from the LMF,  of which Ms. Renuka was an active member, gave valuable inputs and recommendations to the regulators and Government to bring out regulations for the entire sector.  The Microfinance bill was passed in the Parliament in May 2016.  

4. Existing issues when going is bad

The cascading effect of bad debts on cash flows and increased operating cost was inevitable, leading to impacted profit margin.  The Global meltdown and unstable political conditions didn’t leave the markets conducive for further infusion of fresh funds, leading to one of the worst financial crisis.  Thus started the industry restructure.  In order to improve the profit margin a gradual shift from JLG model(one of the core principles of MFI) towards individual loans and mortgage loans was witnessed.  Expansion plans were dropped.

5. Consolidation Phase

As has been in the past, the best inventions always happen during the most troubled times.  The MFI taken up for the sample study revealed the same.  Tracing their path in the last few years led to mentioned findings. 

The organization has adopted the strategy of consolidation and reorganizing during the tough time to enable them set a strong base to set sail when the wind is favorable.  Through the entire process, what stands out is the belief in the MicroFinance model and the unflinching dedication to the goal of Financial Inclusion.  

The factors external to the organization like the political situation, regulation from the governing bodies’ being non-controllable, SMCL took the factors within their control and went out setting their house straight.  

5.1 Technology

Technology played a significant role

The best process improvements can be achieved by using better technology.  So moving from the existing system to a robust and technologically advance system was one of the first steps that the organization took up.  Though this involved investment at troubled times, the organization saw the the benefits outweighed the investment.  Major benefits that they saw as listed below.

Technology benefits

  • In Sri Lanka, people generally don’t want any principal repayment in April as it’s their festival month. In general, this is not possible. But with the help of technology, this can be easily implemented. 
  • Credit policy review- With the help of this software, you can get a review of his credit history. It assesses an individuals’  credit profile and lets the creditor know whether he can be trusted or not. 
  • Close monitoring of the cash flow- It even helps in maintaining the record of cash inflow and outflow.  
  • Mobile access- The software can be accessed through a tab and makes the job of a Loan Officer simple.  Loan officer is able to give all information required by the customer instantly thus increasing customer satisfaction and improves his efficiency.   
  • Improved user experience- The platform has helped improve user satisfaction and experience. Traditionally, the loan origination and management system was quite time-consuming and required human resources. By better utilization of the technology, the work is done a lot faster thus allowing quicker processing.  The organization is looking to beat the interest cap imposed by the government but increasing their volumes.
  • Structured data management- With the help of this system, all the documents and credentials are stored in a well-structured way. Moreover, some of its features are sharing, updating, and automatic creation.  With structured data monitoring, more reports are possible for monitoring 

5.2 Staff intake

The need to control operational expenditure led to low increments and delayed promotions.  This led to resource churning. The industry being niche, the news about company policy and performance spreads easily thereby attracting talent.  – the sunny side of downtrend.  Quoting Ms Renuka “We have employees from other MFI’s  saying they want to join Sejaya as Sejaya truly holds on to the Principals of MFI’s” .  

5.3 Training of field staff 

On being able to attract talent the company spent time and effort in training the staff.  Translating the Mission and Vision of the Organisation to action rests heavily on the field force.  Quoting Ms. Renuka: “We have a unique process.  We believe that creating awareness at the grassroot level about the process is the key to success.  The field force play a very important part in this and the effect of this is seen in all future transactions. So the field officers are trained for a period of month and handheld for another month till they can independently perform. “   

5.4 Revisiting the process

Over the period of time the process of lending has been circumvented leading to the current situation.   The company took it up to reestablishing the Principals of MFI’s like

  • Emphasis of meetings
  • Need for attendance
  • Punctuality of the Group Members as well as the Loan Officer
  • Start and end of meeting on time 

The field officers are expected to maintain punctuality and follow the process strictly.  This helped to establish the credibility factor.  

To ensure adherence to the process and Ms. Renuga herself travels to field 3 days a week to be a part of these meeting.  So the ground reality was not far off and these opportunities were used to streamline the process and make it more effective.  In the process SMCL has been able to establish itself in a position that was more than a mere lender.  They have been able to position themselves are as a financial assistant showing how to utilize the opportunity and get value of it.  As mentioned by Ms Renuka, CEO, SMCL  “Sejaya doesn’t stop with just lending,  We build the relationship by playing the role of their mentors.   We not only provide loans but also guide them on how well it can be utilized to reap maximum benefits.  So in the process we help in improving their standard of living.“

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6. Consolidation Effect

The effect of these measures are evident and SMCL has been able to open 2 new branches last year when the other industry players have either closed down branches or have put expansion on hold to cut cost.  The consolidation has also helped them attract capital infusion from Institutions abroad.  This just reestablishes them as Industry leaders and helps them reaffirm their faith in the process. 

7. Way Forward 

Based on the recommendation from the LMF, the Sri Lankan Government has started to issue licenses for MFI.  To ensure that all existing players can be accommodated, the Government has come out with two types of licenses – one under the Central Bank and the other under the NGO Secretariat.  

To bring in more credibility, SMCL is the process of obtaining financial ranking and getting Client Protection Principals certification.These would help consolidate their position to enable them to take their next steps.  Expansion of network, introduction of mortgage product and introducing savings a product are a few of the things in the pipeline.  Plans to open 4 branches in the current financial  year and 6 in the next year are in place  Introducing savings as product to promote the savings habit helps the clients reduce their dependence on external sources there by empowering them and raising their standard of living.  The Road ahead is clear: From viewing MFI’s as just lending institutions, Sejaya was to establish themselves  as a complete Financial solution provider.