Microfinance in Asia

The following sections are included:

• Contents
• Preface
• Acknowledgements
• About the Contributors

Microfinance has been recognised and considered as the common mechanism to provide credit for the poor and low-income people, especially people in rural areas. Since its initiation in Bangladesh in the seventies, it has been gradually embedded in national strategies of many developing countries as well as universal goal to combat with hunger and poverty in the new millennium. The chapter provides an overview of microfinance and microcredit. The chapter discusses who are the microfinance providers, who do they serve and how do they help the poor. The chapter also provides a summary of empirical evidence on the impact of microfinance.

The rural credit market in Vietnam is characterised as a segmented and emerging market where the growing demand for credit by the poor and low-income households is unmet. This chapter examines the main characteristics of three pillars in Vietnam rural credit market including demand, supply and government policies. While the demand for rural credit is unmet, the supply of credit simultaneously comes from formal, informal and semi-formal providers. To improve credit accessibility, government policies targeting the poor have overcome the obstacle of collateral loan for the poor; however, asymmetric information inherently prevents the poor from having access to credit not only from the borrower’s side but also from the credit institutions. Therefore, improving credit accessibility to the poor and rural households continues a challenging task for policy makers in order to achieve long term development goal in Vietnam.

Microfinance was introduced in Malaysia in 1987 to provide financial access to the poorest member of the society and to reduce the persisting income inequality. Poverty and inequality in Malaysia are characterised by the income disparity between urban–rural populations, gender, as well as among ethnic groups and states. This chapter gives an overview of three main Microfinance Institutions (MFIs) in Malaysia, namely Amanah Ikhtiar Malaysia (AIM), Yayasan Usaha Maju (YUM) and Tabung Ekonomi Kumpulan Usaha Niaga (TEKUN). The three MFIs receive financial support from the Malaysian government but differ in the year of establishment, organisation type, lending schemes, service area coverage and target borrowers. MFIs differ in the performance of their loans’ repayment rate where the high Non-Performing Loans (NPL) can be associated with the loans’ lending terms as well as borrowers’ certain individual and household characteristics. MFIs’ microcredit loans positively affect borrowers’ individual, household and microenterprise economic performances but the magnitudes of the impact vary among MFIs and across economic performance measures. The implications of the presented findings and analysis are discussed, both for the MFIs and the policy makers.

Gap in credit access to rural poor population in China exists because rural households, especially farmers, are constrained to access credit from formal Rural Financial Institutions (RFIs). The risky nature of agriculture business and the absence of land ownership due to China’s village-based communal land-tenure system hinder the farmers from accessing formal credit requiring collateral and force them to resort to informal borrowings that charge exorbitant interest rates. The subsidisedloan programme implemented by the Chinese government in 1986–2000 failed to reduce the credit access gap because it was poorly managed, missed the target borrowers (poor rural households) and was financially unsustainable due to the low repayment rate. Microcredit programme was then introduced in 1994 to bring more effective and sustainable rural poverty eradication. This chapter provides an overview of the rural financial system, rural credit market and the development of microcredit in China. The chapter concludes that microcredit may significantly reduce the gap in the rural credit market and play an important role in rural poverty alleviation provided some reforms are implemented both at RFIs as well as national policy making levels.

Microfinance has been widely discussed as one of the rural development initiatives to distribute credit and financial services to the rural poor in Thailand since the mid-1970s. In 2013, approximately 67.2% of the country’s 7.3 million poor resided in the rural areas and nearly half of them lived in north-east region. Most of the poor are smallholder farmers who experience poverty and live below the basic standard of living. Thus, they require to access credit to invest in their farming businesses and for household consumption. The demand for short-term credit plays an important role in the rural households’ borrowing that is predominantly supplied by the informal lenders. However, during the past few decades, the proportion of credit from formal financial institutions have grown dramatically to substitute the informal credit in the rural areas. This chapter presents an overview of microfinance in Thailand including the types and characteristics.

The growth in the microfinance industry in the Philippines as a potential ‘financial inclusion’ innovation is a welcome development. Micro, small and medium enterprises (MSMEs) and low-income clients are able to increase their economic activity and income, build up assets, prepare against emergencies and invest in education, health and housing services.

But despite the many benefits and growing importance of microfinance, there remain social and financial performance issues as well as impact concerns that continue to challenge the industry. Central to its success is a strong link between rural finance and other components of development like access to basic infrastructure, appropriate technology and improved marketing infrastructure that are necessary conditions for competitive and sustainable economic activities. The inclusion of the private sector in financial intermediation must be reinforced by microfinance institutions (MFIs) and other channels of government funds that have the required competence, network, carrying capacity as well as infrastructure to minimise, if not totally eliminate, credit pollution and defaults. Regular access and proper use of credit ultimately leads to increase in total income, the springboard of the two long-standing development objectives of poverty alleviation and food security. The chapter discusses the role of microfinance in rural development in the Philippines. It particularly identifies the effects of microcredit on input use, productivity and income in the context of Philippine agriculture. The chapter concludes with an overview of the success of microfinance in the Philippines followed by policy directions.

Indonesia is an agricultural country with the world’s largest Muslim population. Islamic microfinance institutions can play a significant role in poverty alleviation in the rural sector predominantly dominated by agricultural activities and poor farmers. The institutions offer unique financial products that cater to the needs of traditional farmers and rural households based on the risk-sharing concept in Indonesia. Islamic microfinance institutions operate cooperatively on equity financing and debt-based financing. Islamic finance provide products and services that parallel with Muslim clients’ religious beliefs. The chapter begins with a historical overview and landscape of Islamic microfinance in Indonesia followed by the principles of Islamic values in Islamic microfinance and the factors that influence Islamic Microfinance Institutions’ performance.

This chapter gives an overview on the microfinance market in Bangladesh, often known as the hub of microfinance institutions (MFIs) in the globe. The development of microfinance is based on the principle of financial inclusion of the poor on one hand and the sustainability of the institute on the other hand. The outreach-sustainability trade off could successfully be achieved by proper targeting and better designing of the microfinance products. The positive impact of microcredit has been widely documented and it produced a momentum in the rural economy which could have been lost if there are no microcredit operations. This chapter explores the evolution and present status of the microfinance market in Bangladesh, supply and demand factors, opportunities for further research and innovations and policy recommendations.

Credit is scarce and capital does not flow naturally from the rich to the poor. The poor have low access to bank credit because of the lack of collateral and because traditional financial institutions find it costly to deal with small credit transactions. Microfinance largely facilitates the poor’s access to institutional credit and has both economic and noneconomic impacts including poverty alleviation, women empowerment, and promotion of gender equality. However, microfinance is not a panacea for poverty alleviation and credit remains inaccessible to certain sectors of society especially the poorest of the poor. To benefit greater segments of society, microfinance should be part of a broader strategy that combines it with other social protection programs.

Microcredit programme was introduced in China in 1994 to ameliorate rural poverty in a financially sustainable way. Since the year 2000, microcredit programmes have been mostly carried out by Rural Credit Cooperatives (RCCs) that have successfully expanded the financial access to farmers and at the same time achieved high timely repayment rate. This chapter draws the case of RCCs’ microcredit in Hubei Province and looks at whether the implementation of RCCs’ microcredit is an effective instrument to improve the rural households’ welfare and whether it actually reaches the poorest population in rural areas. The evidence show that poor rural households are still constrained to access the microcredit due to some household-related factors as well as obstacles at RCCs’ institutional level. The RCCs’ microcredit marginally improve borrowers’ welfare and the positive impact on welfare only takes effect as the cumulative amount of loan grows. RCCs’ microcredit also enables women in rural China to have better social status which is manifested in several dimensions of women empowerment.

Bank Rakyat Indonesia (BRI) provides an example of large-scale rural microfinance banking services that are financially sustainable due to its commercial banking and capital self-sufficiency principles. BRI is also exceptional in the outreach of its microfinance services, with its 8.539 microoutlets in almost all sub-districts throughout Indonesia providing simple and flexible microfinance banking products that in 2015 served 43 million microsavers and 7.85 million microborrowers nationwide. This chapter gives a historical overview of BRI and its successful transformation from government-reliant towards commercial and capital self-sufficiency microfinance banking without overlooking its main mission in catering the rural poor population. The chapter shows how a well-managed microfinance banking system can weather economic crises and help the rural poor cope with economic shocks. The chapter also highlights some implications for the microfinance institutions, BRI in particular, as well as the government as the policy maker.

The following section is included:

• Index