Monday, August 13, 2007

Government and microcredit is a bad chemistry:Muhammad Yunus

Matheos Viktor Messakh/Jakarta

Nobel laureate and microcredit pioneer Muhammad Yunus said Friday that governments should stay away from directly lending microcredits to the poor and better provide good environment for microfinance banking through legal reform.

Speaking at a public discussion at the Ministry of Agriculture, Yunus said that it was a bad idea for governments to get directly involved in lending microcredits to the people.

"The position I again and again promote is that government and microfinance don't work well. It is a bad chemistry. A government basically is a political entity and political entities should not be trusted with the task of lending, particularly lending to the poor," said Yunus who was applauded by the audience.

"The moment the government starts lending to the poor, the political reaction begins: why are you charging interest to the poor people, you can't charge people. After all, you are government," he added.

He said that two conditions were absolutely needed for the development of microfinance in Indonesia. First is funding arrangement, either by allowing microfinance banks and NGOs to take deposits or by creating a wholesale fund.

"This is a fund where a government puts money and that has independent management. So that this fund can lend money to NGOs or microfinance institutions that in turn lend money to the poor. That's much safer, rather than the government running a
microfinance program by itself. Whenever the government tries to do that, it becomes a total mess," said Yunus.

The second condition, said Yunus, was that the government conducted a legal reform to allows the creation of microcredit banks.

"With this law people can specialize in microfinance banking, lending money to the poor without collateral, without guarantee, without any legal instrument, so that people can do things on their own to move up, making income better, as quickly as possible," he said.

Yunus said that several attempts on microfinance had been made in Indonesia for several years but were stuck due lack of fund from the government.

"They got stuck because financing is not available to them. A very simple solution is to create wholesale fund to lend money to microfinance organizations to lend money to the poor. It can be resolved. In Bangladesh we have done it. As a result,
microfinance flourished all over the country. That one step would help a lot," said Yunus.

"People have proved that it can be done, and it is done it very well. Anyone can go and just visit them and find out. So is not a question of whether it can't be done or it can be done. It can be done, it has been demonstrated," he added.

Yunus said that one of the key success of the Grameen Bank was institutional design.

"The institutional design should be right. If we design it right, it works. We make it very independent, we could defy everybody and carry on," said Yunus.

Focusing on the poor and women was also very important to keep the business in its track, said Yunus.

"Go to the poor as far as possible. If you mix up the poor and non-poor, soon you will see that you are not doing microfinance that you are supposed to do. You get into another kind of thing. Focusing on women is also very important. It is so much worth for their families." said Yunus.

Taking savings from the borrowers would create financial strength for the microcredit lenders, said Yunus adding that today 56 percent of deposits of Grameen Bank came from the borrowers themselves.

"They are not only borrowers, but they also save in the bank. That's become important to the bank. This provides a financial strength, and it has to be sustainable. Never shifted from the focus, in order to be sustainable and profit making. We make profit and the profit goes back to the borrowers, because they
own the bank," he said.(02)

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