Complete Intelligence


BBC: How Microfinance Works?

This podcast is originally published by BBC Business Matters in this link with title “Japan earthquake: What impact will it have on the economy?”:

BBC’s Description:

Japan is hit by another earthquake. We hear about the impact it could have on the economy.

We examine microfinance and how it works in practice after a Bangladeshi pioneer of this type of finance is sentenced for violating labour laws.

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I’ve been speaking to Tony Nash. He’s founder of the AI firm Complete Intelligence and formerly a nonexecutive director with Credit Microfinance bank in Cambodia. I asked him first to explain how microfinance works.

Tony Nash

I’ve been working with microfinance in both Sri Lanka and in Cambodia for almost 20 years. And so what we do is we take what’s called concessional safe financial rates from big lenders, whether they’re nonprofits or major international banks, and they lend to the microfinance banks. Most of these microfinance banks are regulated by central banks. So in the past, they were pretty much charities that would lend out at very low rates. They’re now regulated by central banks. So they don’t have a lot of control over a lot of the rates that they lend at. They’re highly, highly regulated by central banks. So what those companies do is they take the, I guess, lower rates. They assume a lot of risk when giving out these small loans, because these are typically people who are, say, pepper farmers, or they’re people who are making small goods or something like that, and collecting the, say, payments on those funds. Actually, in terms of the cost of loan, it’s very high. You have to send somebody out to their house, or you have to maintain that loan.


And Tony, is it actually effective in alleviating poverty, which was Muhammad Yunus’s whole pitch at the beginning. He founded Grameen bank, of course, very involved in putting this together. But has it been effective in bringing people out of poverty?

Tony Nash

It is, absolutely. So when Muhammad Yunus started Grameen, the model they were working on was one of collective responsibilities. So he would lend to syndicates of people, say ten or 20 different people who own businesses, and they were accountable for each other to pay back their loans. That can get pretty difficult in some places when someone doesn’t pay back their loan. Over the last 20 years, that model hasn’t been used for probably 15 years at least. You really have individual loans, and those are largely for people who are starting businesses or other things.


And what about the impact on the people who the money is lent to, who sometimes can’t pay back? Because this has been one of the criticisms that you push people already in trouble into worse trouble.

Tony Nash

Well, so when I was at the bank, we would watch the debt ratios and the non payment ratios very very closely, and they were typically 1% or less, often less than 1%. So microfinance banks have to watch their ratios every month. They have to report them to the central bank every month. So when we hear about microfinance banks that are acting in a way that isn’t appropriate, where they’re leveraging people too much. They may be in a place where microfinance banks are unregulated, where they’re not regulated by the central bank.


Tony Nash, there.