INTRODUCTIONAfter the Second World War there has been an increase in the need for banking services for

credit and savings and the formal banks provide these services through intermediation to facilitate both savers’ and borrowers’ goals. Microfinance institutions are no different except for the fact that its market consists of poor households and very small enterprises (microenterprises) in the rural and informal sectors of developing countries. The formal banking system that serves the intermediation for larger enterprises and wealthier clients find it conventionally difficult or even impossible to provide banking services to the poor and the ultra-poor due to their ignorance, prejudices, misconception and de -motivation to serve the poor .Microfinance is one of the poverty alleviating development strategies with the provision of financial services to the poor on a sustainable basis which helps them to cope with risk, take advantage of income generating opportunities and to ultimately helps them in reducing their vulnerability(Remenyi et.al;2000). It is true that since the 1980s there has been a spectacular proliferation of microfinance institutions (MFIs).At the end of 2005 there were over 3000 MFIs reported worldwide serving about 113 million poor families. As far as outreach to the poor is concerned and the impact on tangible incomes, microfinance has shown a very prominent performance. The promise of microfinance is to achieve a positive impact on poverty via institutions that are fully financially self-sufficient, i.e.; they can survive without subsidies. This is unusual for anti-poverty strategies in which one tends to associate with endless or substantial resource transfers. Microfinance is able to cater to the needs of the poor based on pure market principles. It is generally acknowledged in microfinance circles that at the start of a microfinance scheme some public money is required and even for a transition period till the institution has reached market maturity. But there is a broad consensus that with time subsidies should phrase out. Poverty outreach and financial sustainability are the twin goals of microfinance placing it somewhere between welfare schemes and commercial banking (Balkenhol, 2007). Microfinance as a tool for poverty reduction refers to the provision of financial intermediation through distribution of small loans, acceptance of small savings and the provision of other financial products and services to the poor. In other words the concept of microfinance is to reduce or eliminate poverty within a reasonable period of time by

though for larger loans it may be mandatory. But recently 95% of Grameen’s . MICROFINANCE AND GENDERMicrofinance programmes have a tendency to allocating loans to female clients as they are diligent in terms of repayment of loans. the control over spending passed to the male members. 2000).Also in the case of small loans .al. The Grameen Bank initially lent money to fewer women due to Muslim cultural norms. But many field based studies had revealed that though women had borrowed the loans in the household. This made researchers dig deeper into this aspect of distribution of loans by gender as a reliable indicator of distribution of benefits (Remenyi.providing the poor with access to financial services by the microfinance providers. adaption of strategy by which the poor can identify their own livelihood projects. Microfinance institutions have about 80% women clients of about 34 largest microlenders worldwide.Todd (1996) in her in-depth anthropological study of the Grameen clients said that in poor households .even if the households are not female headed(where the women are the prime beneficiaries). Herein it is important to assess the role of MFIs in lending to women and alleviating poverty and meeting their own sustainability goals.it is believed that the poor households know best not to squander their loans .e. 2000). create sustainable sources of income and provide employment not only to themselves but also to their children.it is very difficult to determine the individual household beneficiaries. Poverty does not stand still if nothing is done to eradicate it and to eradicate this poverty. sustainable livelihoods must be created at a rate much faster than the rate of population growth. She also claimed that it would be impractical to assume that all women were oppressed and that many women took loans from the Grameen Bank to help their husbands. Poverty can be overcome if the poor have access to microfinance services that enable them to acquire productive assets for self-employment . The experience of many microfinance institutions is that the poor are indeed creditworthy and are capable of utilizing scarce capital efficiently in viable income generating projects and they do pay back their loans with interest on time. sons and other relatives.i.Also it may not be justifiable to waste scarce resources in seeing whether the small loans are deployed in consumption or investment purposes. It is almost impossible to achieve this widespread goal without involving the poor themselves in identifying and creating the livelihoods that are consistent with the material circumstances and the cultural milieu in which they live (Remenyi et.

they tend to select themselves into microcredit contracts with all kinds of strings attached like small loans. training sessions.Microfinance in general has reduced the violence against women except for the case study by Rahman(1999) which states that microfinance increased tensions from 70% of Grameen’s borrowers as men felt threatened about their roles as primary breadwinners in these traditional societies. Murdoch. Commercial banks favour men because they have larger businesses and have the assets which the banks seek as collateral. But microfinance involves small businesses in the informal sector and women make up a large and a growing segment of informal sector clients Since women are more credit constrained than men . weekly meetings and joint responsibility of repayment of loans. 2007). 2006) . the income they have earned at other times . MICROFINANCE AND CLASSThere are myriad constraints that the specific features of financial markets impose on the poor due to their lack of collateral and their lack of banking facilities in the areas with low population density (Basu. Murdoch. But the impacts on empowerment will depend on how well a particular programme is designed (Mayaux. Also in Bangladesh microfinance has helped in raising the women's’ income and has brought the use of contraceptives in parlance. 2007).Research shows that the poor people value financial services which helps them spend at one time. 1999). The role of microfinance in developing nations like Bolivia and Bangladesh has brought about other social transformations like decline in fertility rates and illiteracy rates which implies that women have now more time and resources for self-employment (Armendariz. Advocates for microfinance claim that it helps in increasing the bargaining power of women within the household and can also help the women in the case of domestic violence and help them in voicing their rights as their household income increases( Armendariz.But finance can always help the poor in climbing out of poverty. 2007). Murdoch. Muhammud Yunus gives an account of .clients are women and it has helped in showing that women have better repayment records than men and has also proxied with higher household expenditures. help the women in spending the money for childcare and education and help these MFIs in poverty alleviation as women in the developing nations are seen as poorest of the poor being oppressed by their husbands and social norms (Armendariz. From the microlenders perspective it provides better repayment rates.

But the provision of microfinance to such rural target population of poor people would help them climb out of poverty. The 1990s saw partial deregulation of interest rates.But the vast majority of India’s poor still don’t have access to microfinance and informal sector lenders still retain a strong presence in rural India.And further better access to financial facilities like savings. These formal financial institutions are regulated by the Reserve Bank of India and the RRBs are regulated by NABARD. 2006). The informal financiers include landlords . the successive governments have emphasized on the improving of financial access and the reduction of poverty by the process of nationalization of banks in 1969. which provided collateral free loans. Also private commercial banks have derived lessons from microfinance methodologies to deliver rural financial services. Thus it is evident from these two examples that access to finance endows the poor with individual choice and economic freedom and dignity to carry out their talents and ideas to contribute to the wealth of their community and climb out of poverty . But in 1998 when. (a woman by the name of Sufiya Begum) who had to borrow money from middlemen and was embedded in a vicious cycle of loan which reduced her earnings to only 2 cents a day and made her incapable of going out of the clutches of the moneylenders. it helped Pultibai to climb out of poverty by buying more fishing nets and selling more fish and finally earn a high self-esteem in her village.a stool maker in Bangladesh.The formal financial providers include the commercial and regional banks. Basu (2006) gives an account of another fisherwoman from Raipally (Southern India) by the name of Pultibai whose family earning was only $2 a day by selling fish. remittances.The microfinance sector in India is inclusive of SHGs where women's’ SHGs are linked to rural branches of commercial banks. which provided targeted low price loans. Even in India.local shopkeepers. where the poor people live (Basu. rural co-operative banks with a three tiered structure at a state. district and village levels with a Primary Agricultural Credit Societies as retail grassroots outlets and post office systems and mutual funds and insurance companies that have a moderate reach in rural areas. and insurance can help the poor in insuring themselves against periods of low income and maintain their consumption standards via savings. which increased competition in the banking sector and new microfinance approaches that combine the safety and reliability of formal finance with the convenience and flexibility of informal finance . traders and . Development banks like NABARD and SIDBI provide support to both formal and semi-formal segments by refinancing them . a Swayam Krishi Sangam (SKS) was established in Raipally.The other type is MFIs which has over 1 million clients in India. RRBs .

And NBFCs focus on microfinance activities very negligibly (Rao. credit. Further if MFIs are to demonstrate that banking with the poor is indeed profitable and sustainable. Some of these MFIs are also engaged in financial intermediation . There are four types of MFIs operating in the Indian context.) through flexible products at competitive prices presents a formidable challenge in a vast and varied country like India .2.Many SHGs promoted by NGOs and development agencies have been registered as MACs.These MFIs may vary in size. Few MFIs in India are registered as NBFCs although many are aspiring to be the same (which is difficult due to the RBI stipulations). .In this scenario improving access to finance for India’s rural poor to meet their diverse financial needs (savings. managed and controlled by the members for their own development as government owned shares in Co-operative Societies.For these reasons many NGO-MFIs are setting up non-profit companies for their microfinance operations (Rao.2006). 2008).5 million. facilitate the training of SHGs and undertake internal audit and promote new groups. The NGO-MFIs have been formed by the NGOs and these federations have been registered as trusts and societies. They feel that a financial institution including a company set up for this purpose performs better banking functions.moneylenders and they know their clients better than the banks and are better able to enforce contracts .But the opportunities are plentiful and the government has an important role to play in creating space and a flexible architecture for scale-up(Basu. Thus many state governments enacted the Mutually Aided Co-operative Societies Act(MACs) by default of which these MAC enjoy operational freedom from the government (as it is improvised that they don’t accept government loans). capacity building activities.RBI does not regulate MACs even though it may provide financial services to its members. For Profit-MFIs or Non Banking Financial Companies (NBFC) are registered under the Companies Act and are stipulated to have a minimum net owned fund of Rs.Many NGOs feel that combining financial intermediation with their core competency of social intermediation is not the right path. insurance etc. They perform the financial and non-financial functions like social activities.The Cooperative MFIs were formed as the co-operatives organized under State Co-operative Acts did not emerge as business enterprises owned. they need to function as separate organizations to avoid cross-subsidization . Those NBFCs accepting public deposits are subjected to capital adequacy requirements and prudential norms. 2008). philosophy and their approach may not be the ideal institutions for financial intermediation and are still outside the realm of financial regulation and face problems in getting funds from higher financial institutions as they are non-profit in nature.

But from field. BRAC. MFIs also face the dilemma of retaining their old clients who have climbed out of the poverty line rather than letting them go into the hands of the commercial financial markets. and based on these stratifiers the poorest are put at the bottom of the poverty pyramid and the richest are put at the top which decides the potential clientele for the MFIs (Remenyi. The identification of the poor again is a very cumbersome process as the poor may often overstate/understate their household incomes (Todd. The giants of microfinance like the Grameen Bank. 1996). Outreach to the poor refers to the extent to which MFIs are able to expand their client base of genuinely poor beneficiaries like poor women with microfinance services .MFIs generally regard the monetary aspects of microfinance that entails the provision of an efficient financial market which is based on an economic.However sometimes they tend to attract clients who are the near –poor or the not poor due to the trickle-down effects to the lowest income earners as the poor and the near –poor are active in the same markets for goods and services . ASA and P4K have worked in this mechanism. Also the lack of targeting of the genuinely poor with a conceptual definition of per capita income or calorie intake becomes a cause of leakage of resources from the poor to the near- . human rights. BRI and BRAC retain their old clients who are now APL for repeat business as they think of their successful clients as assets to be nurtured .But off-late many NGOs that have strategic alliances with MFIs like the SEWA in India and the Indonesian Welfare Association in Java that help in addressing empowerment issues of the non-economic aspects of microfinance like gender issues. number of animals owned in the village etc. justice. ASA. 2000). However whether these issues make these NGO-MFIs complementary or competitive agenda of being a successful MFI provider is a debate in microfinance literature (Remenyi. 2000).Also it would lead to cross-subsidization of benefits to the poor. minimalist approach for targeting poverty . 2000).based experiences it is evident that the direct targeting of the poor allocates resources. both financial and human properly for poverty alleviation. health issues and illiteracy etc.Thus myriad cost-effective strategies on identifying the poor is done based on asset ownership.But this policy directly conflicts with these MFIs’ policy of targeting the poorest of the poor and may misplace their resources from potential new clients who are BPL(Remenyi. Most prominent MFIs like the Grameen Bank.

Few of the microfinance institutions have been operating in the Asia –Pacific since the 1970s and most of the MFIs have been operating since the 1990s.In this short time –span these institutions have somewhat digressed from conventional banking norms in terms of securing loans on collateral.poor. It is evident that the field staff may usually find it easier to motivate the near-poor than the poor who are by default suspicious and cautious. the Philippines and Thailand . China. And microfinance has seen from praxis that this does happen by providing services to the poor women (Getubig. The socio-economic burden of the structural adjustment is carried disproportionately by the female population and their children which is further worsened with rapid population growth in the poor economies like Bangladesh. Poverty in these nations is not only a social malady but it is also a globally acclaimed gender issue. 2000).Microfinance has an important role to play with consumption growth and economic development especially in nations like Indonesia (which was the worst effected economy from the Asian meltdown).The UNDP Human Development Report for of 1997 indicates that at least one-fifth of the population of the Asia and the Pacific remained below the poverty line after the Asian meltdown in 1997-8. 2000). . Also conventional targeting measures of per capita income or calorie intake are costly and self-targeting measures like surveys and small loan sizes are affected by the socio-political milieu of the region (Remenyi. 2000. Gibbons and Remenyi. COUNTRY-CULTUREMicrofinance in general and microfinance for the poor are relatively new fields where the praxis is hardly backed by any theory (Getubig. Indonesia. client repayment of loans and focussing on especially poor women clients who have again very unconventionally become good clients of these MFIs with retrospect to poverty reduction . India. Gibbons and Remenyi.Only if the creation of sustainable livelihoods exceeds the rate of population growth. the poverty of these nations would decline. Papua New Guinea. Women and girls worldwide comprise of 70% of the worlds’ poor and two-thirds of the worlds’ illiterate.

financial co-operatives and postal savings banks. families and the individual moneylenders’ .No regulation is done over their activity and they take up microfinance lending as a voluntary activity. credit associations.TYPE OF GROUP FORMATIONMFIs differ both in their institutional point of view as well as in terms of their aims and objectives. From a regulatory perspective they can be classified as informal. and Ireland like the Credit Union and the Rotating Credit Savings Associations (ROSCAs) in developing nations are also a part of MFBs. critics assert that it may not be the case for poverty alleviation via financial intermediation to the .2006. The formal microfinance providing institutions are all banks of which there are three types: the microfinance banks(MFBs). Within MFSBs there are similar financial intermediaries who for economic reasons or for their own image see microfinance as a lucrative activity by downscaling their activities to a limited extent compared to their own business and create specific companies or divisions involving microfinance within their organizations(Torre. commercial banks and financial conglomerates who operate specialized financing to microenterprises. semiformal and formal institutions. They provide the resources to their members from a common pool of fund and they have a basic structure of co-operative companies which collect funds mainly through partners. Of these the financial NGOs are the most popular as they grant funds for developmental projects alongwith technical and social intervention for the beneficiaries (Torre.K. Development banks .2006). the microfinance oriented banks(MFOBs) and the microfinance sensitive banks(MFSBs). Within the MFOBs there are the financial intermediaries like banking groups. The co-operative banks of nations like U.Within the MFBs there are pure microfinance banks(PMFBs) which only render microcredit services in terms of their widening of their client base and the maintenance of their economic sustainability.Although there are many experts who proclaim that it may be a panacea for alleviating poverty. The informal institutions comprise of the SHGs.which also fall under MFBs are large centralized and government owned banks created to support specific sectors or specific areas and in developing nations they can also take the form fo private banks. CONCLUSIONMicrofinance is an evolving concept as more and more information come to hand. The semi-formal microfinance financial intermediaries are not banking institutions but they are registered entities are inclusive of the financial NGOs.

2000). consumption. usage of financial services in Hyderabad revealed that almost two-thirds of the sample had one loan and almost no MFIs were available to render these loans. or the credit with education strategy of Pro Mujer in Latin America .Critics like Mayaux and Adams(2001) assert that women get funds from the informal sector and the provision of microcredit must go hand in hand with the group organization to address other issues . 2007).BRAC provides lessons on new productive activities and also holds sessions on legal. A randomized study on Spandana’s microfinance programme on income. consumption smoothening rates and repayment rates by allowing loan products that are flexible at different periods.al. For Product Design of Financial Services the CMF collaborated with MFIs to evaluate costs and benefits of different product designs. the largest microlender in Bangladesh. they require within household specialization which reinforces their dependency on the male members due to their limited access to inputs. . And even when they are in control.al. Murdoch.financial and governance variables that the microfinance programmes assess rather than the development impact and it often makes the poor borrow too much as seen from the Andhra Pradesh controversy. 2007). productivity.. They had almost no access to health insurance and other financial facilities and microfinance would help them come and expand their revenues rather than wasting their expenditures.Rankin(2002) argues that microfinance may entrench rather than challenge gender roles as in traditional societies it is mostly the men who control the microenterprises investments and income. The randomized experiments with the Village Welfare Society in West Bengal revealed that the mahajan or the piece-meal MFI clients prefer the weekly repayment schedules and the market based clients prefer the monthly repayment schemes as they sell on credit(Duflo et. The CMF also conducted a study of the impact evaluation of the Weather Insurance with SEWA in Gujarat in understanding the benefits and limitations of rainfall insurance (Duflo et. supplies and marketing facilities(Armendariz. social and health practices(whose expenses are disbursed via government and donor agencies funds).Thus microfinance advocates who stress on gender empowerment tend to focus on programmes that add training and consciousness-raising such as the programme organized by BRAC. In microfinance studies critics always assert that there are only organizational .poor(Remenyi. 2007). The KAS foundation which has a monthly repayment scheme to its SHG clients was studied by the CMF for studying the flexibility of loan products to study business income.

convenience . while formal savings include banks. Also studies were made with migration issues in Orissa and Ajiwahika in Jharkhand wherein MFIs provide innovative financial services like remittances inked to loans and savings which is feasible in Orissa but not functional in Jharkhand due to lack of infrastructural facilities. salary structures.al. The study also revealed that women's’ income varied seasonally. These costs depend on factors like geographical location of the MFIs.continuity and flexibility required by low income customers . 2007). .Furthermore microfinance because of its huge outreach can also become an effective and sustainable delivery channel for services that have high social impacts and benefits like simple health intervention(Duflo et.. conveyance costs and the number of fieldworkers per group as some of the operational costs(Duflo et. they liked the service of agents and they wanted the option of withdrawing money in case of emergency. 2007).. But there is an immediate problem of microfinance lenders for microfinance customers to graduate and there are problems to offering the reliability. post offices and regulated chit funds. unregulated chit funds etc. Thus the problem of graduation of the formal banking sector must go hand in hand with the government and the private sector that can play a critical role in this context (Basu. The success of MFIs is also depends on financial and organizational issues. These result in high transaction costs and research needs to be done as to how to reduce these costs. Some MFIs provide different advice on income generation or encourage cohesion to their clients that increase the repayment benefits of the clients like in the case of SEWA . petty cash.al. buying gold.The study of Microcredit Foundations of India (MCFI) at Madurai revealed both informal savings like jewellery shops. 2007).al. It is an outcome of good management like doorstep services and close monitoring. Microfinance can serve as a quick way to deliver finance to the poor. insurance companies.. 2006). little faith in existing services and limited information flows(Duflo et.In India and Bangladesh the notion of graduation has been abandoned unlike in the case of Indonesia where the Bank Rakyat Indonesia(BRI) has built networks with Badan Kredit Desa(BKD) which avails little graduation as they have been developing products that serve for the smallest scale clients.

There are also measures needed for improving contract enforcements and the legal framework of modifying land tilling laws. making composite financial services like insurances and remittances and simplifying the procedures to open a bank account and access credit. Better dissemination of credit information would directly increase the amount of financing for rural borrowers by reducing transaction costs and costs related to default risks. There must be more regulation and supervision of RRBs and co-operative banks which would pave the way for restructuring these banks. crop insurance and commodity price insurance to reduce default risk. There must also be attention given to the demand side of the poor by providing them assistance in skills development. The improvement of incentive regimes and the promotion of competition can be done through the deregulation of interest rates based on disaster based regulation and rehabilitation measures rather than the wavering of interest rates. Default risks can be minimized by better price delivery. The low cost ways of reaching the rural poor through the formal sector can be done via introducing flexible and easily accessible products. 2006). They must design their products of low weekly instalments as in the Grameen case and also good staffing would enhance the effectiveness of microfinance. 2006). The overcoming of geographical concentration in microfinance can be done via setting of quality NGOs like Rastriya Mahila Kosh (RMK) that help in supporting hundreds of small NGOs all over the eastern region. technology and marketing facilities that help in providing increase in incomes and improving rural livelihoods (Basu. There must also be attention paid towards the quality and sustainability . and provide better staffing policies and doorstep banking and using of technology to drive down transaction costs (Basu. The government must also revisit the policy of priority sector lending in rural areas and allow entry of private banks in rural areas. . Indonesia and other countries so that they serve the poor segments of society. Also the inclusiveness and competition in the microfinance sector can generate huge pay-offs for the poor as they always need someone to borrow money from.There must be a clear targeting of clients as seen from the studies of Bangladesh. The scaling up of microfinance can be done by enabling a policy for banks to lend to SHGs to provide a legal and regulatory environment for microfinance.There must be medium term key reforms in government policy that are required to improve the efficiency and banking of rural finance.

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