By Ramesh S Arunachalam , Rural Finance Practitioner
It has been commonly argued that MFIs have a very useful role to play in micro-pensions. However, there are inherent differences between the traditional Micro-finance and The New Micro-Pensions and this has implications for the use of MFIs in distributing Micro-Pensions. I try and look at some of these issues in a series of posts, starting with this post:
Nature of Product: First, micro-finance (read as small loans) consists mostly of short-term products (1 year normally). Some times, as in the case of larger livelihood loans (through producer organizations like SIFFS), they could have terms of two or three years. The traditional MF loan is an asset for the institution and a liability for the individual client and the MFI has to weigh the pros and cons of making the loan to the clients. Implied in this is the fact that the MFI has to trust the borrower to make the loan repayments and this also involves the MFI having some understanding of the low-income borrower’s (rather volatile) cash flow situation. That said, it can be argued that while estimating this cash flow (over a single year) is itself difficult, it can however be done with some allowances, that MFIs can usually live with.
On the other hand, Micro-Pension is typically a long-term product. There are two issues here: a) The requirement of the MFI to be able to be reasonably sure of (each) clients’ future cash flows and their ability to consistently make several future payments towards the product; and b) The aspect of the client having faith and trust in the MFI (and the fund manger where different), over a very long period of time – especially with regard to the fact that will (indeed) get back their money after this long period of time. So, from both the perspective of the institution (MFI) and the clients, micro-pension is a far more complex product than micro-finance. Therefore, the MFI management and systems including processes and procedures (apart from governance) must be such that they provide a very high degree of comfort (in terms of safety) and transparency to clients. This apart, the MFI must have the ability and local networks that enable them to have in-depth knowledge of their clients and their situations in the first place. This is also very critical.
Read the rest on the Microfinance in India Blog