Lack of funding hampers MFIs
The lack of funding sources and restrictive external commercial borrowing are hampering the growth of microfinance institutions (MFIs) in the country, according to representatives of these institutions.
The country’s MFIs provide loans in rural areas for agriculture, small businesses, farms and machinery, which helps boost the rural economy.
However, MFIs’ lending rates are relatively high compared to traditional banks due to high operating costs. The MFIs grant loans at interest rates of 15 to 22 percent per year. According to the Royal Monetary Authority, MFIs can lend up to Nu 0.5 million (M).
Karma Thinley Dorji, chief executive officer (CEO) of Tarayana Micro-finance Private Limited (TMF), said there are two types of funding sources – grants and soft loans from banks.
TMF is 75 percent owned by the Tarayana Foundation and 25 percent by the two FDI investors. TMF offers an interest rate of 15 percent. There are currently 350 customers with disbursed Nu-40M loans.
He said the microfinance institutions cannot borrow money from local banks because of high interest rates. “We can’t borrow from the local banks at less than 9 percent, if we borrow at 9 percent and give to customers at 15 percent, we couldn’t afford high operating costs.”
Karma Thinley Dorji also said that the Treasury has restricted external commercial borrowing (ECB). “ECB guidelines could be reviewed and revised to ease access to finance.”
He said the ECB is available at a low interest rate of 1 percent to 2 percent.
ECB refers to commercial credit in the form of bank loans and trade credit drawn by non-resident lenders. The government held onto the ECB to secure the country’s foreign exchange reserves.
The only incorporated companies registered under the Companies Act of Bhutan but excluding financial institutions, individuals, trusts, non-governmental organizations and cooperatives are eligible borrowers under ECB guidelines.
Karma Thinley Dorji also said the government may also consider making funds available to MFIs at a lower interest rate.
“Due to the lack of funding, MFIs’ loan portfolio remains the same and cannot grow,” he said.
Tarayana Micro-finance Private Limited typically seeks project-based donor funds.
Ugyen Dorji, CEO of Bhutan Micro-finance Private Limited (BMPL), said if MFIs get soft financing, their interest rates could be lowered. “Although there is more demand, we lack the funding.”
He added that the BMPL pays depositors an interest rate of 10 to 10.5 percent.
He also said that if MFIs were also allowed to conduct IPOs in the stock market, MFIs could see growth.
BMPL makes agricultural, housing, and micro-enterprise or small business loans at 18 percent, 18.5 percent, and 19.5 percent, respectively.
There are 345 borrowers: 180 in agriculture, 68 in housing and 53 in micro-enterprises or small businesses with a total loan disbursement of Nu 65 million.
Ugyen Dorji also said that a credit limit of Nu 0.5 million is not enough to build a decent house as the cost of materials has increased.
The CEO of TMF also said that the microfinance institution is coming with the digital payment system integrated with the Bank of Bhutan’s mbob, which is expected to be launched in September. “That would lower operating costs.”
Renew Microfinance Private Limited CEO Tshering Dema said they offer loans at 15 to 22 percent, which is high due to high transaction and operating costs, including the company’s large infrastructure and the strength of its employees.
“High operating costs are inherent to MFIs and it would be wrong to compare them to conventional banks. The geographic terrain is also a challenge,” said Tshering Dema.
She said the break-even rate is 19 percent. “Customers want to lower the interest rate, but we also need to be mindful of our sustainability,” Tshering Dema said. “Responsible borrowers would be encouraged with the variable interest rate to encourage and motivate them. The interest rate could go as low as 15 percent.”
To lower interest rates, Renew Microfinance is developing innovative business mechanisms such as digital banking that will reduce operational costs.
However, Tshering Dema said digital banking is expensive because most customers are illiterate. “If we want to develop an app, we really have to adapt it, that would be even more expensive.”
There are currently 26,000 customers who have paid out Nu 242M. Most debtors work in agriculture. Tshering Dema said they are also developing crop insurance for customers with the help of World Food Planet. The company’s bad debt rate is 6 percent.
Renew Micro-Finance also plans to launch Green Finance, namely biogas and solar panels. Tshering Dema said solar panels are expensive and subsidies from the government help customers.