Covid-19 Reset: How public deposits in MFIs can help alleviate poverty

At the PanIIT Global eConclave, Nobel laureate Muhammad Yunus underscored the importance of financial inclusion and said that Microfinance Institutions based in India should be allowed to accept deposits from the public. In meeting the Covid-19 crisis, business ecosystems around the world are preparing to adopt new models of corporate framework and innovation, driven by a change in the conventional working mechanism. 

The newer models of the micro-credit system deliver a strong perspective that advocates purpose-led value creation through the establishment of platforms that enable Microfinance Institutions (MFIs) to accept public deposits. 

In many countries, MFIs are classified as 'Non-bank financial institutions (NBFIs)'. NBFI is defined to be a financial institution that does not possess a full banking license and, hence, cannot accept deposits from the public. At first, the stakeholders will have to have an acute understanding of the objectives of the microfinance system where MFIs are allowed to accept deposits. The Reserve Bank of India (RBI) has allowed interested parties to open small financial institutions that can accept deposits. 

This particular policy would help MFIs extensively. In many countries, MFIs are not allowed to accept deposits and, as a result, the cost of funds for the beneficiaries becomes significantly higher because MFIs borrow money from banks. In Bangladesh, MFIs are only allowed to collect deposits from their members who are often the poorest of the poor. 

According to the Microcredit Regulatory Authority (MRA), MFIs serve more than 30 million people in Bangladesh. The World Bank has predicted that the Covid-19 pandemic would result in the largest contraction in global per capita income since the Second World War. 

Certain estimates show that more than 100 million people from all around the world could be pushed into extreme poverty, striking out all previous advancements made in poverty alleviation in the past few years. However, a unique opportunity to shape an inclusive and sustainable economy still exists in these difficult times. 

Professor Yunus has underlined the importance of a modification in the existing government policy in India to give banking licenses to financing corporations. This would enable the financial institutions to accept deposits from micro-entrepreneurs and give them credits. A rural-centric lending policy is imperative to help underprivileged people get access to funds for starting a business. 

Such an initiative dedicated to socially, economically and educationally backward people would enable the governments in developing countries to make use of their unique skills and talents. These policies will act as potential platforms to solve the problem of economic inequality by generating employment. Besides, purchasing power is likely to improve as well. 

During one of his recent interactions, Prof Muhammad Yunus said, "Why should the poor man's deposit be sent to fund the needs of the rich of the urban? Rural deposits should be used to fund the rural economy. Just allow the MFIs to accept deposits. The government just needs to bring a change to the policy, nothing more. Not a rupee is needed from the government to bring about the change in the rural economy if this is implemented." 

Nitin Gadkari, the current Union minister of Micro, Small and Medium Enterprises in India, agreed with Muhammad Yunus and addressing Yunus, he said, "You start a brainstorming session on this subject with Niti Aayog. Prepare the proposal and give it to me and I will take it to the cabinet and Prime Minister and Finance Minister for approval. I am very keen to take this forward. The more people you involve the more red-tapism will there be. This model should not have any government control because only then we will be able to avoid complications." 

In today's world, the lending capacity of a financial institution is restricted by the magnitude of their customers' deposits. In order to lend out more, such an institution must secure deposits by attracting more consumers. 

Some economists opine that deposits create loans and without sufficient deposits, there would be no loans. The core criticism of microfinance is its relatively high-interest rates. In many contexts, it is considered that as the MFIs are not allowed to accept deposits from the public, they resort to high-interest rates to ensure sustainability. The capacity of bank lending is not entirely restricted by the institution's capability to attract new deposits but by the central bank's monetary policy decisions about whether or not to increase reserves.

However, given a particular monetary policy regime and barring any increase in reserves, the financial institutions can increase their lending capacity by securing new deposits or simply by raising the interest rates within the regulations. Financial corporations require deposits to meet consumer demands and to facilitate banking operations. 

Besides, deposits are needed to cover deficit management in times of economic disasters. In emerging economies, unforeseen economic disasters occur frequently and to cope with such situations, funding is integral for the survival of financial institutions. An element of continuity with the conventional definition of microcredit is that microfinance programs broadly intend to support income-generating activities. 

A World Bank report suggests that a total of 1,516 MFIs represents a diverse range of institutions and serves more than 1.4 million borrowers as well as 2.7 million depositors in Azerbaijan and Central Asia. Due to the facilitation of public deposits in MFIs, the rural economy has been positively affected in Central Asia. The interest rates in microloans are evaluated to be at least 30% to 50% higher than commercial banks. 

However, the costs for processing a microcredit loan is sufficiently higher than what is expected. In spite of higher interest rates being associated with microcredit, demand for microfinance services remains strong at the base of the economic pyramid and a noticeable increase in its demand after the pandemic is being anticipated. The pandemic has hampered the progress emerging economies made on the global stage. 

In developing countries, the introduction of newer services within the micro-credit system is critically important for alleviating poverty in the post-pandemic era. It is difficult to evaluate the efficiency of policy implementation due to measurement difficulties and endogeneity that exist within the banking system. Thus, a paradigm shift in the global microfinance industry may be regarded as a requirement to start the successful recovery in the post-Covid 19 world.