Muhammad bin Ibrahim: Rethinking microfinance norms
Special address by Mr Muhammad bin Ibrahim, Governor of the Central Bank of Malaysia (Bank
Negara Malaysia), at the Global Symposium on Microfinance, Kuala Lumpur, 22 May 2017.
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Thank you for the opportunity to speak today at this Symposium. Bank Negara Malaysia is
pleased to host this event together with the World Bank. We are also pleased to have Finance
Minister II, Yang Berhormat Datuk Seri Johari Abdul Ghani present with us to address the
audience here today.
It has been almost six decades since the economist John Kenneth Galbraith observed that few
things are more evident in modern social history than the declining interest in inequality as an
economic issue. Today, financial and economic inclusion is given priority as a policy agenda, as
the global economy confronts an environment of rising income inequality and tepid global growth.
According to the World Bank, the distribution of income globally is highly unequal today with a
Gini coefficient of 70.7, up from 68.4 in the 1980s. In some countries, income inequality has in
fact risen sharply.
The challenge of income inequality is even more prominent in Asia. A Working Paper published
by the IMF in 2016, highlighted that in Asia, the average Gini coefficient has risen by 4 points from
36 in 1990 to 40 in 2013. Over the same period, the average Gini coefficient for the rest of the
world rose by only 2 points. This is against the backdrop that Asia experienced an average GDP
growth rate of 9.6 percent. This suggests that trickle-down economics has failed to deliver
equitable growth.
We should expect that if significant segments of the population are systematically excluded from
the tools that drive success, there will be economic consequences. Financial access and
education are arguably two of the most critical tools that enable individuals to achieve success.
Yet, around 50% of the global population live on less than USD2.50 per day, most of them without
access to formal financial services.
That is almost one in two people who, given the opportunities that come with financial access,
could be making much greater contributions to society, and consequently, raising economic
potential. We also learnt that, stagnating median wages have discouraged the low and
middleincome from saving and investing.
Against this backdrop, microfinance has captured the global imagination of policymakers,
development institutions, private enterprises and donors alike to promote greater financial
inclusion. Yet over the last few decades, since Grameen Bank entered the world's
consciousness, microfinance has had a mixed experience. World views on this subject have
also become more polarised. Some consider microfinance to be the panacea (which it is not) to
end poverty, others have been highly critical of its abuse to exploit the poor.
These characterizations are very diverse but it is useful feedback that we should ponder. These
contrasting views illustrate the complexities and challenges associated with the subject.
Microfinance, like all public policies, faces the challenge of implementation. From a financial
stability perspective, it is about introducing riskier and less experienced borrowers into the
financial system. Hence, the implementation aspect is critical, especially in the attempt to
balance the trade-offs between financial stability and inclusion. This is never an easy task. For
every success of microfinance, we have seen some failures. One example that comes to mind
is the case of a large Asian economy in 2010 where the unrestrained growth of micro lending led
to high debt stress among borrowers, financial instability, and sensationalized newspaper
accounts of suicide among borrowers.
However, these challenges must not sway our resolve to further the cause of microfinance. We
must continue to find new and more efficient implementation strategies. Forums such as this
give us an opportunity to examine these issues more closely, and share successes and pitfalls
so that others might benefit. We therefore welcome the publication of the World Bank's report on
financial inclusion in Malaysia which we hope will also hold useful lessons for others.
Malaysia has devoted significant focus to the sustainable development of microfinance over
many years to boost growth and improve welfare. More than 75% of businesses in Malaysia are
micro enterprises, and 40% of Malaysia's households earn incomes below USD850 (RM3,650) a
month. The view that distribution, not just aggregate growth matters, is therefore, a view that
resonates strongly with us.
William Faulkner, the famed American writer and Nobel laureate, once spoke of the all-important
virtue of "trying until we get it right". He urged writers to "throw away anything that is false, no
matter how much he might love that page or paragraph". In a similar vein, Malaysia's
microfinance journey has been one of trial and error, as we continuously strived to increase the
social and economic impact of microfinance, sometimes working against the tide of popular
thinking. This has led to a more nuanced approach to the development of microfinance over time,
and an ongoing process of rethinking norms which we may take for granted today.
Today, I would like to talk about three perspectives that have shaped the way we approach and
implement microfinance in Malaysia.
First, technology when used in a clever way, can be of great use. While technological
advancements hold great promise for expanding access to financial services for the poor, we
need to invest time and resources to understand the factors that affect the poor, and the suitable
approach to generate income and create wealth. These insights are what will determine whether
technology is central or peripheral to the inclusion agenda.
Second, the tradeoffs between financial stability and inclusion requires smart management. A
microfinance strategy that focuses largely or wholly on providing credit to the unserved is almost
destined to fail, potentially leaving communities worse off from excessive debt burdens. Instead,
implementation strategies should ensure that the provision of credit are complemented by the
necessary safeguards and financial education.
Third, successful microfinance programs are fundamentally compatible with sound commercial
and management principles and practice, and normally have two things in common; an
obsessive focus on operational innovations and the ability to create powerful synergies.
We have built on these premises to continuously adapt, amplify and align our approach. This
year, we have embarked on an initiative, working with the Credit Guarantee Corporation in
Malaysia, to develop behavioral insights that will enable microfinance providers to integrate
business and technological strategies that best serve the poor. The initiative will leverage on
analytics to identify drivers of borrower behavior, and expand the use of psychometric tools by
financial providers to develop financial solutions that are more responsive to the needs and
circumstances of micro borrowers.
A deeper understanding of borrower behaviors also provides a solid foundation for executing
successful operational strategies. In fact, operational innovations - even those that represent
small adjustments to existing processes - can have a far more important impact on smart
design than a costly, hi-tech re-tooling of financial services.
Our experience in Malaysia suggests that simple changes in application procedures and faster
processing times have encouraged a higher take-up of microfinance. Flexible repayment
schedules have also enabled borrowers to better manage irregular cashflows while continuing to
meet their repayment commitments. Repayment reminders, delivered in ways that are relatable
to the poor (for example, "your repayment can help your friend in need"), can help keep
repayments current. Working through local community groups to engage borrowers, or
identifying with religious tenets to overcome weak willpower to repay, are some experiential
learning that creates favorable conditions that can expand access to credit and encourage high
repayment rates.
These "small nudges", a notion popularized by behavioral scientist David Halpern, allow us to
revisualise how operating models and technology can be adapted more effectively and efficiently to
deliver sustainable microfinance solutions.
Malaysia's microfinance journey has also reflected a wider focus on developing the broad range
of financial services that are needed by the unfortunate to manage and improve their financial
circumstances. Credit is important, but not all important. Savings, insurance, business training
and financial education are other key components of our program approach which work together
to amplify the economic and social impact of microfinance.
The largest microfinance institutions in Malaysia are also among the largest mobilisers of micro
savings. As a case in point, our National Savings Bank ranks among the top three financial
institutions in the country with the largest number of micro-loan and savings accounts. Overall,
92% of the population have a deposit account, compared to 42% who have a loan account.
We are also currently working to expand the offering and take-up of micro insurance solutions
under a multi-pronged strategy that combines tailored products offered by insurance companies
and development financial institutions, and a universal product option available through low-cost
mobile and other channels.
Documented studies have shown how simply introducing an affordable, safe and accessible
avenue for savings resulted in increased spending towards healthcare, education and nutrition. It
has empowered women with more decision-making power and enabled children to spend more
on school supplies that ultimately led to better test scores. Insurance has also been shown to
play an important role in encouraging micro enterprises and low income households to make
productive investments without the fear of natural disasters or medical emergencies wiping away
their hard-earned assets and savings.
By providing opportunities and the foundational knowledge to low income individuals and
entrepreneurs to gain access to credit, increase savings and manage their exposures, this would
greatly improve the probability of success in business and enhance socioeconomic mobility. This
in turn will bring many important benefits to society.
These benefits might be difficult to quantify but are obvious and far reaching. This is illustrated in
the story of a Malaysian micro-entrepreneur who spent 10 years selling raisins and dates from
street corners in and around Kuala Lumpur. He travelled daily to and from night markets and
mosques on his motorcycle; his fortunes often at the mercy of unpredictable weather. But
opportunity beckoned when a micro loan was obtained in 2011, which enabled him to rent a
permanent physical space and invest in a basic logistics system to stock and deliver goods to
customers. With the continued support of his bank, business grew, three more stores were
opened and sales increased fivefold. He secured greater financial security and independence for
his family and at the same time, created jobs for 10 persons within his community. As a
contribution to his community, one of the three branches was dedicated for micro-entrepreneurs
in the locality to showcase their products, free of rental.
This simple and generous gesture to share resulted in positive spillovers, where some once
wayward school-leavers and young adults received the opportunity to become owners of small
businesses plying delicate handicraft and innovative accessories.
There are many examples such as this, that if done right, can create a virtuous cycle of
expanded positive spillovers that uplift the community as a whole.
Despite what seems to be an increasingly crowded space, microfinance often ends up being
relegated to government-sponsored institutions, non-profit enterprises and donor organizations,
because it is perceived to be financially unsustainable if a certain scale is not achieved (usually
very large) or imposing high interest rates to hedge risks or cover high operational costs. A
growing body of experience shows that the reverse is necessary to deliver a lasting positive
impact on the lives of the poor.
I have alluded earlier that aligning operational strategies with behaviors of micro borrowers can
improve loan performance, thus reducing risks to lenders. In insurance, traditional agency-based
distribution models are being disrupted to lower the costs of on-boarding and servicing micro
policyholders. These are clear ways in which the trade-offs between higher perceived risks,
accessibility and affordability associated with the micro segment can be managed more
optimally. Sustainable microfinance programs are often successful if synergies are realized.
Between governments, policymakers, microfinance institutions and donor organisations,
significant synergies can be unlocked by aligning incentives, reducing barriers and enhancing
coordination.
The agent banking framework implemented in Malaysia has been a successful model where
industry is able to capture opportunities for cross-sector strategic partnerships that can
transform the microfinance landscape. Collaborative strategies to deliver solutions on telco and
e-commerce platforms are similarly redefining new business models.
For donors, the adoption of performance-based rewards should be strongly encouraged to focus
on microfinance institutions to effectively serve their mandate. The reward system should take
into account outreach, financial performance and impact on wellbeing.
Another important point is that, regulators and supervisors should ensure regulatory framework
should be proportionate in balancing innovation, inclusion and stability.
Conclusion
All of us have an important role to play in confronting the stark reality that the socio-economic
dividends of a global wealth and growth need to be cascaded to all. The vulnerable segment
cannot afford to wait for trickle-down growth.
As policymakers, we should be concerned with effective financial intermediation and sustainable
growth. We are duty-bound to make sure that the fruits of economic prosperity are more
equitably shared. As a community, we are morally obligated to provide opportunity and hope for
the unserved to improve their livelihood.
Malaysia's journey will not track exactly the same path as others, nor should we expect it to. But
we can all learn something from the footsteps left by others as we move forward. I hope that our
collective journeys, as shared in this forum and others like it, will help us harness the full potential
of microfinance to build stronger, fairer and more resilient communities.