BAKU, Azerbaijan, Aug. 26
Economists always imagined urban economy as the engine of the economy. Rural economy was assigned the role of supplier of labour and agricultural inputs.
It may had justification in the past given the lack of basic infrastructure in the rural areas. But not anymore. Although the world has changed, the urban-rural relationship has remained unchanged. Today's rural areas are endowed with the same basic infrastructure as the urban centres. There is no reason to keep the rural economy as an appendix to urban economy, no reason to send their labour as migrant labour to find livelihoods in the urban centres. If right institutions are built and right policies are adopted, they can find their survival livelihoods around their home. Rural economy must be built as parallel economy, an independent economy to open up opportunities for its own human and natural resources.
Informal Sector or Micro Entrepreneur Sector
Corona crisis revealed many weaknesses of Indian economy — for example, helplessness of the people in the so-called 'informal sector'. They constitute majority of the work force of India. We saw how income of the daily income earners suddenly disappeared, how millions of migrant workers had no options but to head for home thousand miles away, on foot.
Economic theory in its broad and impatient brush created a sector called 'informal sector' as a catch-all sector for those who could not yet enter the formal sector. It was a convenient way for the theory to keep these people out of their theoretical sight, and move on with the exciting sector they call 'formal sector'. Economic theory treats informal sector as a waiting room before getting entry into world of economic activities — the formal sector. They argue that the bigger the population in the waiting room the less is the capacity of the economy, because the informal sector doesn't add any capacity to the economy.
Job comes as the ticket to allow an individual from informal sector to enter into the formal world, or the economic world. Economists feel their only obligation to informal sector is to create jobs. Since jobs are in the urban centres they found it justified to remain busy with urban economy. That made informal sector and rural economy largely forgotten part of economics.
Working for creating Grameen Bank gave me the realization that economic theory interpreted the situation in a completely wrong way. I saw the informal sector as the power house of the economy. I felt terribly unhappy that because of gross mis-conceptualization by theoreticians, so much human creativity gets wasted every moment.
This mis-conceptualization is clearly reflected in the dismissive name they came up with for this sector, the 'informal sector'. Another strange name they use for this sector is 'unorganized sector'. It appears funny to me because economists, in the first place, refuse to make any effort to organize it, then put the blame on it by calling it an 'unorganized sector'.
We can divide the sector in two parts, a) one part consisting of wage earners who sell their labour for a living, with traditional verbal contracts, and b) the second part is made up with people making a living by petty trading, or producing various products such as, handicrafts, household products, and equipments, or by offering services.
I strongly felt that appropriate name for this sector should be 'Micro Entrepreneur Sector', to reflect what happens inside this sector and to recognize its entrepreneurial potentials. I see this sector as the creative hub of the economy. It thrives with natural energy of human beings. It is the seedbed of people's natural entrepreneurship. Many of the people in this sector are making a living by informal wage jobs, primarily because they could not find money to start a micro business.
Since economists abandoned the informal sector, micro entrepreneurs remained deprived from the attention of the policy-makers, political leaders, legislators, and academics. On the other hand, with supports from academic and political sides, the labour in the formal sector continued to attract attention of the governments around the world, which led to establishing Ministry of Labour in every government. In the process labour got dedicated institutions for itself, and achieved many legal and political rights. In India, after many campaigns and struggles some micro entrepreneurs got recognition as formal labour by claiming themselves to be 'self-employed labour'. Unfortunately, it needed them to mis-categorise themselves as 'labour', to have access to some rights.
Covid-19 revealed in a massive way how vulnerable the micro entrepreneurs are in an economy like that of India. It made it very urgent that the entire theoretical framework be reviewed and corrected by recognizing the 'micro entrepreneur sector' and bringing all the legal, politicalz, social and financial support for this sector. This sector should be recognized as the massive base of the national entrepreneurship pyramid which ranges from multi-billion-dollar entrepreneurs at the peak, and multi-hundred-dollar micro entrepreneurs at the bottom. Viewing them as the base of the entrepreneurship pyramid of the country it is easy to recognize them as the most important emerging economic force, rather than a burden on the society. Then policy goals become easy to visualize. These policy goals would be to support the micro entrepreneurs to achieve entrepreneurial successes by creating financial, legal, and support institutions dedicated to addressing their needs and problems.
Government can start with providing legal support. Existing rules and procedures on how to register businesses, how to operate them within the limits of legal boundaries, how to interact with the government agencies, how to interact with tax authorities, etc, are all created by keeping large or medium size businesses in mind. If micro entrepreneurs are asked to comply with all these laws and regulations they'll be in a big crisis. These are way above their heads. They'll have no other way but to go underground, or give up their businesses and show up in the employment lines for their survival.
To avoid such a situation government may take a general decision that no existing laws and regulations will apply to micro entrepreneurs, government will make separate set of laws and regulations specifically for micro entrepreneurs. To start the process government may start with making laws and regulations to support micro entrepreneurs, rather than to taking away any freedom they enjoy now. For example, government may recognize them as special category of business with a given set of rights in operating their businesses. The government may make it clear that only the laws and regulations made specifically for micro entrepreneurs will apply to them, not the pre-existing laws and regulations.
Create Ministry of Micro Entrepreneurs
A government traditionally has a Ministry of Labour headed by a full minister. This displays the political and economic importance given to the labour. Under the same logic I see it very important to create a Ministry of Micro Entrepreneurs to provide the legal, institutional, and political support to the micro entrepreneur sector. After all they constitute more than half the population of the country who remained neglected and abandoned for no fault of their own.
If a government is interested in building rural economy as a parallel economy, in stopping migration of youth to the urban centres, in industrialization of rural areas by processing rural produce with rural labour, and in integrating women and neglected segments of the society into the mainstream economy, creation of this ministry will a powerful step and a clear message to the rural areas.
Agency for Assisting Micro Entrepreneurs
Parallel to creating new sets of laws and a regulatory system for micro entrepreneurs, the Ministry of Micro Entrepreneurs can create a separate government agency dedicated to helping the micro entrepreneurs to deal with all government offices and agencies. This newly created government agency, the 'Agency for Assisting the Micro Entrepreneurs', will be dedicated to making communication between government and the micro entrepreneurs very easy. This agency will interpret the language of the government to the micro entrepreneurs, and vice versa. It will protect the rights of the micro entrepreneurs. If any micro entrepreneur or group of micro entrepreneurs have any problem with any government office or agency, or any entities — government, or non-government, they will bring their problems to this office. The responsibility of this agency is to resolve the problem by protecting the interest of the micro entrepreneurs. The staff of this agency should make themselves recognized as friends of micro entrepreneurs.
This agency will also help micro entrepreneurs to establish their 'Chambers of Micro Entrepreneurs' at various levels, local, district, state, and national level, to interact, with other similar bodies, and the government.
Nobody Has to Leave the Place of Birth to Find Survival Livelihood
Corona Pandemic has brought a new opportunity for the whole world, to build the world with a new beginning, to abandon what anything that stands on way to building a new economy and a new society, and introducing the new ideas and concepts which will be the building blocks of the future. India must not miss this opportunity. India needs to take very bold decisions to redesign the economy and the society. Creating a people-centric economy must be the core of this programme. One core goal of this redesigning programme must be to make sure that nobody— men, women, youth, has to leave his or her place of birth to find a survival livelihood. There should be enough opportunities for survival livelihood within the walking distance of one's own home. A concomitant goal should be that nobody has to go to a loan shark to take the initiative to become a micro entrepreneur. Financial institutions will be standing by to support the entrepreneurship of all people. No young person has to leave his/ her villages to go to urban centres to pursue quality higher education. Academic institutions of high standards will be available in the rural areas. Universities, IITs, IIMs, medical colleges, hospitals, business schools, research institutions will be built up to make sure rural people do not have to abandon their own villages for quality healthcare and education. India already has examples of world class academic and heath institutions located in remote rural areas. Now they stand out as exceptions. They have to be done as a matter of policy and a matter of right of the rural people.
Freeing the Micro Entrepreneurs from Loan Sharks
The moment we view the people in the informal sector as micro entrepreneurs, scope for building new institutions emerges right away.
By building appropriate financial system for the rural area we can ignite life at the base of the entrepreneurship pyramid. Finance is the basic fuel of entrepreneurship. But fair financial services always remained far cry for the micro entrepreneurs. In the absence of any financial institution built for them, they remain to be the prime meat for loan sharks. Most of the micro entrepreneurs begin their entrepreneurial journey empty handed. Their entrepreneurial ventures start with financing from loan sharks, and they can hardly grow out of it because of the harsh conditionality of the loans. Micro credit emerged as a big new help for them, but it could reach only small part of them yet.
Most important support for micro entrepreneurs will be to protect them from loan sharks.
Recent Initiatives in India to Expand the Credit Horizon
India has worked on the goal of expanding the credit horizon for over the last three decades by bringing access to credit to the poorer segments of population, particularly rural women, through microfinance programmes. While the access to formal credit has improved significantly, it is still long way to go for vast majority of micro entrepreneurs to free themselves from loan sharks.
NABARD promoted the SHG model and provided refinance to banks who lent to such groups which came to be known as the Bank Linkage model. The number of borrowers under the SHG lending and the MFIs put together is estimated to be about 85 million. Commercial banks also work with MFIs as their channels for distributing priority sector loans and other government schemes such as MUDRA (Micro-Units Development and Refinance Agency) loans for micro-entrepreneurs.
Microfinance has to depend on loans from banks, large NBFCs and equity from commercial venture capital firms. The result is the high cost of lending to small ticket borrowers and short duration of loans for their borrowers. Faced with the high cost of funds, the return-seeking MFIs focus on the low-middle income segment of the population. They added consumption loans in their portfolio to enhance profitability, deviating from the objective of microfinance to concentrate on income-generating loans. Being deprived from the permission to take deposit the MFIs remained as agents of the financing institutions without having any chance of ever becoming self-reliant institutions.
True Microfinance is a Social Business
Some MFIs were given a license to turn themselves into Small Finance Banks. With the requirement of high capital requirement it went to the hands of profit-seeking investors. I always draw attention to the fundamental features of microfinance institution that we developed.
Basic elements in this financial institution are: a) it must be a social business bank, b) dedicated to rural poorest — focusing on women, to support their entrepreneurship, c) it will be based on banking without collateral, d) and it will be a proper bank with deposit taking power to make sure it remains to be a financially self-reliant institution.
Social business part of microfinance is not only completely forgotten, many microfinance institutions were created by enthusiastically promoting themselves as highly profitable businesses. We created microfinance institutions to fight loan sharks, but never thought a day may come when microfinance institutions themselves may become the tool in the hands of loan sharks. This abuse the concept of microfinance. became quite wide spread. We keep on drawing attention to the difference between true microfinance institution and wrong microfinance institution by insisting that a true microfinance institution must be designed and operated as a social business.
Microfinance originated with Grameen Bank in Bangladesh by challenging the banking system. It pointed out that the real reason for not lending money to the poor by the banks, is not about the credit-worthiness of the people, as is usually explained, it is the absence of people-worthiness of the banks. Grameen Bank developed a daring concept of banking, — banking without collateral, defying the existing banking norms. This became known as microcredit or microfinance. India adopted it and expanded to become it the largest microcredit programme in the world. Two basic features of microfinance are missing in India, a) running it as a social business (i.e. as a business without any intention to make personal profit out of it by the non-borrowers), and b) taking deposits. Now is a good time to integrate these two features in the Indian microfinance world.
Will Microfinance in India survive Covid 19 Crisis
Now corona crisis has given rise to a new question — can microfinance in India survive this massive crisis.
Given our experience in Bangladesh, the answer is a firm 'yes'. Bangladesh goes routinely through floods and cyclones, destroying houses, possessions, animals, businesses, even taking lives. But microfinance always bounces
back. Poor people's lives are woven with endless disasters. Coping with disasters is an integral part of microfinance. Grameen Bank made sure its staff understood that microfinance is about people, not about money. Money is a tool to give the people a chance to fight for their lives.
Micro Entrepreneur Bank for Micro Entrepreneur Sector
Micro entrepreneur sector as a whole deserves a new class of dedicated financial institution, as Social Business Micro Entrepreneur Bank (MEB). Entire micro entrepreneur sector will dramatically change if it is created by passing a new law, if needed. MFIs and small finance banks can take up leadership role in creating social business MEBs. It will be made legally mandatory to make all MEBs as social businesses.
Social business is a business with zero personal profit, aiming at solving of specific problem faced by people. This is a very important feature to be built into any financial institution built for the micro entrepreneurs. Given the tradition of loan sharking, financial institutions built for micro entrepreneurs quickly start imitating loan sharks in their operations. If there is no bar on taking personal profit from MEBs investors looking for high profit will rush to it attracted by the size of the market. Safest thing to do is to close the door for personal profit by requiring by law that MEB to be social business.
Existing commercial banks, small finance banks, cooperative banks, any other financial organizations, NGOs, companies, individuals, MFIs may apply for MEB license as a subsidiary or as a new entity.
MEBs may create Social Business Venture Capital Funds as their subsidiaries to provide equity to unemployed young people to become entrepreneurs
The goal of MEBs would be to free all micro entrepreneurs from loan sharks — formal, and informal.
Dedicated Regulatory Authority is Crucial for Success
Another important aspect to ensure success of MEBs is to create a dedicated regulatory authority. If MEBs are regulated by regulators who are not well-versed with the concept and the creativity needed for the operation of financial institutions for the poor, it will be doomed to failure. Unsympathetic regulators can destroy the entire possibilities of financial institutions for micro entrepreneurs. To achieve success the best thing to do is to create an autonomous regulatory authority under the chairmanship of the Governor of RBI. Bangladesh created a Microcredit Regulatory Authority as an autonomous entity headed by the Governor of the central bank, by an Act of Parliament back in 2006. It contributed significantly in the success of micro-credit system in Bangladesh.
MEB Should be Created as a Rural Institution
In order to make rural economies as independent economies one fundamental requirement would be to create institutions dedicated to rural areas. Historically urban institutions were extended to the rural areas to fill the need for institutional services to rural areas, ignoring the fact that urban institutions were not good fit for rural areas. They were not enthusiastic about doing this job either. As result rural areas never had the opportunity to grow in its own way.
MEBs could be the first step to create rural financial institution exclusively dedicated to the needs of the rural areas. To make it grow as a rural institution the headquarters of MEBs should be located in rural areas. It should mobilize rural and urban deposits to benefit the rural micro entrepreneurs, in contrast to urban-centric banks which mobilize rural deposit to transfer it to urban areas.
Government may encourage all commercial banks and financial institutions to create social business MEBs as rural subsidiaries serving rural micro entrepreneurs. To encourage them government may give incentives to banks and all financial institutions such as providing preferential treatment in their core businesses depending on the size of their MEB operations.
In addition to dedicated social business MEBs, there should be exclusively designed social business venture capital funds, social business investment funds, social business insurance companies, and so on.
Time is Right
Creation of Social Business Micro Entrepreneur Bank is the key to unleashing the entrepreneurial power of masses and creating the rural economy as a parallel economy to the traditional urban-centric economy.
Given the right conceptual framework and appropriate institutions and policies, rural economies can be strong economies dealing with the rest of the world. With information and communication technology covering all
rural areas in India and cleaner air quality, if we can add good political leadership, presence of quality educational institutions and healthcare facilities rural areas will enjoy many advantages over urban centres as a choice of location for many businesses. Transporting unprocessed agricultural inputs and sending migrant labour to the cities can be made a matter of past. It is the new vision of rural economy which will make this happen. Time is right for this new vision.
By Professor Muhammad Yunus
Nobel Peace Laureate 2006
Founder of Grameen Bank
Honorary Member of the Nizami Ganjavi IC