PROJECT REPORT

{SUBMITTED FOR THE DEGREE OF B.COM 3RD YEAR (6TH

SEMESTER) HONOURS IN ACCOUNTING AND FINANCE UNDER
THE UNIVERSITY OF CALCUTTA.}

TITLE OF THE PROJECT:-

MICROFINANCE INSTITUTIONS

SUBMITTED BY:-
NAME- SUNANDITA MUKHOPADHYAY
COLLEGE ROLL N0.- 318
REGISTRATION NO.- 212-1211-0280-17
NAME OF THE COLLEGE- MAHARAJA SRIS CHANDRA
COLLEGE
CU ROLL NO.- 171212-11-0042
SUPERVISED BY- Mrs. SUPTI K. SARDAR

24th SEPTEMBER, 2020

 ACKNOWLEDGEMENT
I WOULD LIKE TO EXPRESS MY SPECIAL THANKS OF
GRATITUDE TO MY TEACHER Mrs. SUPTI K. SARDAR
AS WELL AS OUR PRINCIPAL WHO GAVE ME THE
GOLDEN OPPURTUNITY TO DO THIS WONDERFUL
PROJECT ON THE TOPIC MICROFINANCE
INSTITUTIONS, WHICH ALSO HELPED ME IN DOING A
LOT OF RESEARCH AND I CAME TO KNOW ABOUT SO
MANY NEW THINGS.
I AM REALLY THANKFUL TO THEM.
I AM DOING THIS PROJECT NOT ONLY FOR MARKS
BUT TO ALSO INCREASE MY KNOWLEDGE.
THANKS AGAIN TO ALL WHO HELPED ME.
 STUDENT’S DECLARATION
I HEREBY DECLARE THAT THE PROJECT WORK WITH THE
TITLE MICROFINANCE INSTITUIONS SUBMITTED BY ME FOR
THE PARTIAL FULFILMENT OF THE DEGREE OF B.COM
HONOURS IN ACCOUNTING & FINANCE UNDER THE
UNIVERSITY OF CALCUTTA IS MY ORIGINAL WORK AND HAS
NOT BEEN SUBMITTED EARLIER TO ANY OTHER UNIVERSITY
FOR THE FULFILMENT OF THE REQUIREMENT OF ANY
COURSE OF STUDY.
I ALSO DECLARE THAT NO CHAPTER OF THIS MANUSCRIPT
IN WHOLE OR IN PART HAS BEEN INCORPORATED IN THIS
REPORT FROM ANY EARLIER WORK DONE BY OTHERS OR BY
ME. HOWEVER, EXTRACTS OF ANY LITERATURE WHICH HAS
BEEN USED FOR THIS REPORT HAS BEEN DULY
ACKNOWLEDGED PROVIDING DETAILS OF SUCH LITERATURE
IN THE REFERENCES.

DATE:- 25/09/2020

NAME:- SUNANDITA MUKHOPADHYAY

ROLL NO.:- 171212-11-0042

REGISTRATION NO.:- 212-1211-0280-17

 INDEX
1. INDEX
2. CONCEPTUAL FRAMEWORK-
NATIONAL AND INTERNATIONAL
SCENARIO
3.PRESENTATION OF DATA-
ANALYSIS AND FINDINGS
4.CONCLUSION
5.BIBLIOGRAPHY
 INTRODUCTION
POVERTY HAS BEEN A TOPIC OF DISCUSSION BOTH FOR THE AKADEMIA AND
GOVERNMENT AS POOR HAVE BEEN COMPLETELY OR PARTIALLY EXCLUDED
FROM THE FORMAL FINANCIAL SYSTEM FOR DECADES. LACK OF ACCESS OF
FORMAL FINANCIAL SERVICES HAS PROMPTED THE FORMAL SECTOR
ORGANIZATIONS, WHICH INCLUDES GOVERNMENT, NON GOVERNMENT, AND
PRIVATE TO MEET THE NEEDS OF THE POOR. MICROFINANCE HAS BEEN THE
TERM WHICH REFERS TO THE FORMAL AND INFORMAL ARRANGEMENTSOF
PROVIDING FINANCIAL SERVICES TO THE POOR FORTHE UPLIFTMENT FROM
POVERTY. IT IS MICROFINANCE WHICH OVER THE PAST DECADES HAS
CHANGED THE PERCEPTION OF POOR FROM NON BANKABLE TO BANKABLE
AND RECOMMENDING VARIOUS METHODOLOGIES TO PROVIDE FINANCIAL
SERVICES. ALSO, MICROFINANCE OVER THE YEARS HAS NOT ONLY TRIED TO
ALLEVIATE POVERTY ACROSS THE WORLD BUT ALSO SHOWN GLIMPSES OF
SUSTAINING THEMSELVES FROM PROFIT EARNED IN THE PROCESS. HENCE IT IS
SEEN THAT THEY ARE DOING WELL BY DOING GOOD WHICH HAS BROUGHT
MICROFINANCE TO A GLOBAL STAGE.

MICROFINANCE HAS BEEN PROVEN TO BE A TOOL TO ALLEVIATE POVERTY

FROM THE FACE OF EARTH. IN THE PAST TWO DECADES IT HAS EMERGED AS
AN INDUSTRY TO CATER TO THE FINANCIAL NEED OF THE POOR WHOM BANKS
HAVE TURNED DOWN DUE TO LACK OF COLLATERAL.
MICROFINANCE INSTITUTIONS DATES BACK TO THE 18th CENTURY IN ENGLAND
AND GERMANY. HOWEVER, THE MOVEMENT EXPERIENCED A BOOM IN THE
1970s IN BANGLADESH AND LATIN AMERICA. THE YEAR 2005 WAS DECLARED
THE ‘THE INTERNATIONAL YEAR FOR MICROCREDIT’ BY THE UNITED NATIONS,
AND IN 2006 MUHAMMAD YUNUS, WHO FOUNDED THE SUCCESSFUL
GRAMEEN BANK, A PIONEERING INSTITUTION IN THE MICROFINANCE SECTOR
IN BANGLADESH, RECEIVED THE NOBEL PEACE PRIZE.

THE CONCEPT GAINED WIDE ACCEPTANCE WHEN IT WAS SEEN THAT

ECONOMICALLY VULNERABLE POPULATIONS COULD TAKE ADAVANTAGE OF
OPPURTUNITIES TO IMPROVE THEIR LIVES THROUGH THEIR OWN MEANS AND
UNDER THEIR OWN RESPONSIBILITY. WHILE THE INITIAL GOAL WAS TO
PROVIDE LOANS AT A LOWER COST THAN THE OPTIONS TRADITIONALLY
AVAILABLE TO THESE POPULATIONS, THE CONCEPT HAS EVOLVED AND TODAY
MICROFINANCE INSTITUTIONS OOFER A WIDE RANGE OF FINANCIAL
PRODUCTS AND SERVICES.

MICROFINANCE HAS GAINED THE ATTENTION OF THE FINANCIAL AND

DEVELPOMENT SECTORS, WITH A MULTITUDE OF INSTITUTIONS SERVING THE
TARGET GROUP AND SPECIALIZED INVESTROS MANAGING MULTI-MILLION-
DOLLAR FUNDS.

NEVERTHELESS, THE MICROFINANCE SECTOR FACES LIMITATIONS. DIFFERENT

STUDIES IN RECENT YEARS RAISE THE DOUBTS ABOUT THE POSITIVE
SOCIOECONOMIC IMPACT THAT MICROFINANCE PRODUCTS AND SERVICES
CAN HAVE ON THE LIVES OF CUTOMER; MANY MARKETS ARE STRUGGLING
AGAINST THE DESTRUCTIVE TREND OF OVER-INDEBTNESS OF CUTOMERS, AND
THE TOTAL NUMBER OF CUTOMERS SERVED HAS NOT REACHED
SATISFACTORY LEVELS GIVEN THE ESTIMATED DEMAND OF 2.5 BILLION
PEOPLE. IN PARTICULAR, THE RURAL SECTOR REMAINS UNDESERVED DUE TO
THE HIGH OPERATING COSTS AND THE FACT THAT THE RISK INVOLVED IS
OFTEN UNKNOWN AND DIFFICULT TO ASSESS OR MONITOR WITH CURRENT
METHODOLOGIES.
RECENTS TRENDS IN THE TECHNIFICATION OF THE SECTOR ARE MAINLY
FOCUSED ON THE PROVISION OF MONEY TRANSFER SERVICES AND THE USE OF
INFORMATION AND COMMUNICATION TECHNOLOGIES.

POOR PEOPLE GET OUT OF POVERTY BY BORROWING, BUILDING

MICROENTERPRISES AND INCREASINF THEIR INCOME. THE NEW PARADIGM
PLACES MORE ATTENTION ON THE EFFORTS OF POOR PEOPLE TO REDUCE
THEIR MANY VULNERABILITIES BY KEEPING MORE OF WHAT THEY EARN AND
BUILDING UP THEIR ASSETS. WHILE THEY NEED LOANS, THEY MAY FIND IT AS
USEFUL TO BORROW FOR CONSUMPTION AS FOR MICROENTERPRISE. A SAFE,
FLEXIBLE PLACE TO SAVE MONEY AND WITHDRAW IT WHEN NEEDED IS ALSO
ESSENTIAL FOR MANAGING HOUSEHOLD AND FAMILY RISK.
 CONCEPTUAL FRAMEWORK-
NATIONAL AND INTERNATIONAL
SCENARIO
HISTORICALLY, MICROFINANCE REFERS TO MICRO-CREDIT. A MICRO-CREDIT
CORRESPONDS TO A CREDIT OF LOW AMOUNT DESTINED TO PEOPLE HAVING
LITTLE OR NO INCOME.

WHAT IS OFTEN LACKING IN EMERGING COUNTRIES ARE NOT INITIATIVE TO

GET BY, BUT MONEY NECESSARY TO START YOUR COMPANY. TO RESPOND TO
THE NEEDS OF THOSE A TYPICAL CUSTOMERS, MICROFINANCE INSTITUIONS
HAVE PUT IN PLACE SERVICES, FINANCIAL PRODUCTS AND NON-FINANCIAL
PRODUCTS THAT ARE IMPORTANT TOOL TO COMBAT POVERTY. IN TURN,
MICROFINANCE IS A MEANS OF REACHING AUTONOMY.

MICROFINANCE IS MOSTLY PRESENT IN EMERGING COUNTRIES AND IN

DEVELOPING COUNTRIES. THE ENTIRETY OF FINANCIAL SERVICES THAT DERIVE
FROM IT HAVE CONTRIBUTED TO SENSIBLY IMPROVING LIVING CONDITIONS
OF THE POPULATIONS, IN PARTICULAR BY INCREASING THE ACCESS TO THE
BANKING SYSTEM OF CERTAIN COUNTRIES. THOSE SERVICES ARE ONE OF THE
SUCCESS FACTORS OF SUSTAINABLE DEVELOPMENT GOALS, BEACUSE THEY
FAVOUR AND INCREASE ENTERPRENEURSHIP AMONG OTHER THINGS.

OFTEN THE FIRST AND ONLY PRODUCT PROPOSED BY THE MICROFINANCE

INSTITUTIONS, MICRO-CREDIT HAS BEEN CONSIDERABLY DEMOCRATISED.
EVEN THOUGH VAST DIFFERENCES EXIST BETWEEN COUNTRIES.

A MICRO-CREDIT IS USED ON THE ONE HAND TO FINANCE AN ACTIVITY

GENERATING INCOME AND THE OTHER HAND TO IMPROVE LIVING
CONDITIONS OF THE HOUSEHOLD ON THE SAME TERMS AS A CONSUMPTION
CREDIT.

THE AMOUNTS OF MICROCREDIT VARY GREATLY DEPENDING ON THE

COUNTRIES, THE MICROFINANCE INSTITUTIONS AND THE SOCIAL ECONOMIC
SITUATION OF THE COUNTRY CONCERNED. MICROCREDITS CAN GO FROM
FEW EUROS TO HUNDREDS OR THOUSANDS OF EUROS.

THE MICROCREDIT BAROMETER SUMS UP THE TENDENCIES OF THE

MICROFINANCE SECTOR WORLDWIDE, IT GIVES VISIBILITY TO THE INITIATIVES
HAVING A STRONG SOCIAL IMPACT AND PROMOTING THE GOOD PRACTICES
OF THE SECTOR.

THE CREDIT AGENTS WORK FOR MICROFINANCE INSTITUIONS AND IS THE

DIRECT LINK TO THE CLIENT. A TRUSTWORTHY RELATIONSHIP IS ESSENTIAL.
THE CREDIT AGENT IS A MAN OF GROUND. HE IS LEAD TO TRAVEL DAILYWITH
THE AVAILABLE MEANS OF TRANSPORT IN ORDER TO MMET THE CLIENTS.
VERY OFTEN, THE ENETERPRENEURS ARE SITUATED ARE COUPLE OF
KILOMETRES WAYS FROM THE MICROFINANCE INSTITUIONS. IT IS THEREFORE
VITAL FOR A CREDIT AGENT TO MEET THEM AT THEIR WORKPLACE OR HOME.

HE HAS MULTIPLE ROLES. HE RECUPERATES THE REFUNDS OF THE ONGOING

CREDITS, PROPOSES NEW SERVICES, GRANTS CREDITS AND ALSO HELPS
FAMILIES TO MANAGE THEIR MONEY.IN DOING SO HE ABLES TO PLAY THE
ROLE OF AN EDUCATOR.
MUHAMMAD YUNUS IS A BANGLADESHI SOCIAL ENTREPRENEUR, BANKER,
ECONOMIST, AND CIVIL SOCIETY LEADER WHO WAS AWARDED THE NOBEL
PEACE PRIZE FOR FOUNDING THE GRAMEEN BANK AND PIONEERING THE
CONCEPT OF MICROCREDIT AND MICROFINANCE. THESE LOANS ARE GIVEN TO
THE ENTREPRENEURS TOO POOR TO QUALIFY FOR TRADITIONAL BANK LOANS.
IN 2006, YUNUS AND THE GRAMEEN BANK WERE JOINTLY AWARDED THE
NOBEL PEACE PRIZE FOR THEIR EFFORTS THROUGH MICROCREDIT TO CREATE
ECONOMIC AND SOCIAL DEVELPOMENT FROM BELOW. THEY HAVE ALSO
SHOWN THAT EVEN THE POOREST OF THE POOR CAN WORK TO BRING ABOUT
THEIR OWN DEVELOPMENT. YUNUS HAS RECEIVED SEVERAL OTHER NATIONAL
AND INTERNATIONAL HONOURS. HE RECEIVE THE UNITED STATES
PRESIDENTIAL MEDAL OF FREEDOM IN 2009 AND THE CONGRESIONAL GOLD
MEDAL IN 2010.
LOANS TO POOR PEOPLE BY BANKS HAVE MANY LIMITATIONS INCLUDING
LACK OF SECURITY AND HIGH OPERATING COSTS. AS A RESULT,
MICROFINANCE WAS DEVELPOED AS AN ALTERNATIVE TO PROVIDE LOANS TO
POOR PEOPLE WITH THE GOAL OF CREATING FINANCIAL INCLUSION AND
EQUALITY.

ELA BHATT HAD INITIATED WOMEN’S OWN SEWA COOPERATIVE BANK IN 1974
IN AHMEDABAD, GUJARAT, PERHAPS ONE OF THE FIRST MODERN DAY
MICROFINANCE INSTITUTION OF ITS KIND.

MUHAMMAD YUNUS, A NOBEL PRIZE WINNER, HAD INTRODUCED THE

CONCEPT OF MICRO-CREDIT IN BANGLADESH IN THE FORM OF THE ‘GRAMEEN
BANK’. THE NATIONAL BANK FOR AGRICULTURE AND RURAL
DEVELPOMENT(NABARD) LOOKED AT SEVERAL MODELS FOR OFFERING
FINANCIAL SERVICES TO THE UNBANKED, ESPECIALLY WOMEN, AND DECIDED
TO EXPERIMENT WITH A VERY DIFFERENT MODEL, NOW POPULARLY KNOW AS
SELF-HELP GROUPS(SHGs). IN THIS APPROACH, A SMALL GROUP OF
WOMEN(AND MEN) ARE ABLE TO FORM THEIR OWN LITTLE MINI BANK, SELF-
GOVERNED AND MANAGED, AND CREATE LINKS WITH BANKS SHGs, NGOs
AND BANKS. SHGs ARE OFTEN FORMED AND NURTURED BY NGOs AND ONLY
AFTER ACCOMPLISHING A CERTAIN LEVEL OF MATURITY IN TERMS OF THEIR
INTERNAL THRIFT AND CREDIT OPERATIONS, THEY ARE ABLE TO SAVE, AND
ALSO SEEK CREDIT FROM THE BANKS. THERE IS OFTEN AN INVOLVEMENT OF
AN NGO, OR A GOVERNMENT AGENCY DURING INITIAL TRAINING AND EVEN
AFTER THE SHG-BANK LINKAGE. THE SHG-BANK LINKAGE PROGRAMME,
WHICH HAS BEEN IN PLACE SINCE 1992 IN INDIA, HAS SAVINGS ACCOUNTS
WITH 7.9 MILLION SHGs, WITH 4.6 MILLION SHGs HAVING OUTSTANDING
LOANS, WITH APPROXIMATELY $2 BILLION IN SAVINGS WITH BANKS, AND $8.9
BILLION LOANS IS OUTSTANDING LOANS, MAKING IT ONE OF THE LARGEST
MICROFINANCE PROGRAM OF ITS KIND IN THE WORLD(MARCH 2016). IT
INVOLVES COMMERCIAL BANKS, REGIONAL RURAL BANKS (RRBs) AND
COOPERATIVE BANKS IN ITS OPERATION.
IN 2013, GRAMEEN CAPITAL INDIA WAS ABLE TO LOAN $144 MILLION TO
MICROFINANCE GROUPS. IN ADDITION TO GRAMEEN BANK, EQUITAS HAS
BEEN ANOTHER MICROFINANCE ORGANIZATION IN TAMIL NADU. THE SOUTH
AND WESTERN STATES ARE THE ONES ATTRACTING THE GREATEST NUMBER
OF MICROFINANCE LOANS.

IN 2014 CRISIL RELEASED ITS LATEST REPORT ON THE INDIAN MICROFINANCE

SECTOR TITLED “INDIA’S 25 LEADING MFIs”. THIS LISTIS THE MOST
COMPREHENSIVE AND UP TO DATE OVERVIEW OF THE MICROFINANCE
SECTOR IN INDIA AND THE DIFFERENT MICROFINANCE INSTITUTIONS
OPERATING IN THE SUB-CONTINENT.

MANY LOAN OFFICERS IN INDIA CREATE AN EMOTIONAL CONNECTION WITH

THE BORROWERS BEFORE THE LOAN REACHES MATURITY BY MENTIONING
DETAILS ABOUT BORROWERS’ PERSONAL LIFE AND FAMILY AND ALSO
DEMONSTARTING AFFECTION IN DIFFERENT WAYS AS A STRATEGY TO
GENERATE PRESSURE DURING RECOVERY.
THE PURPOSE OF MICROFINANCE INSTITUION IS TO FULFILL THE FINANCIAL
NEEDS OF THE POOR EITHER THROUGH INFORMAL OR FLXIBLE APPROACH.
THERE IS NO SINGLE MODEL THAT FITS IN ALL THE CIRCUMSTANCES. BROADLY
THE MICROFINANCE MODELS CAN CLASSIFIED INTO SIX GROUPS:-

 GRAMEEN BANK MODEL

 JOINT LIABILITY GROUP MODEL
 INDIVIDUAL LENDING MODEL
 THE SELF HELP GROUP MODEL
 VILLAGE BANKING MODEL
 CREDIT UNIONS AND COOPERATIVES

GRAMEEN BANK MODEL WAS FIRST PROPOSED BY MOHD.YUNUS IN

BANGLDESH. IT IS ONE OF THE OLDEST AND ONE OF THE MOST SUCCESSFUL
MODELS OF MICROFINANCE. IN THIS MODEL THE MONEY IS LENT TO A GROUP
OF FIVE MEMBERS. EACH MEMBER MAKES MANDATORY CONTRIBUTION TO
THE GROUP SAVINGS FUND FOR A FIXED PERIOD OF TIME. THE LOAN IS NOT
GIVEN TO EACH MEMBERAT THE SAME POINT OF TIME BUT IS GIVEN IN TURNS
AND ALL STANDS FOR EACH OTHER’S OBLIGATION TO PAY BACK THE LOAN.
THE GROUPS ARE CREATED UNDER THE SUPERVISION AND STRUCTURE
PRESCRIBED BY THE MFI, TO FACILITATE ACCESS TO FINANCIAL SERVICES.
GRAMEEN MODEL HAS BEEN REPLICATED IN MORE THAN 40 COUNTRIES IN
ASIA, AFRICA, AND LATIN AMERICA WITH MODIFICATIONS TO SUIT LOCAL
CONDITIONS AND CULTURES.

IN JOINT LIABILITY GROUP MODEL 4 TO 10 INDIVIDUALS ARE ORGANISED IN A

GROUP KNOWN AS JOINT LIABILITY GROUP.THE GROUP MEMBERS CAN
REQUEST FOR BANK LOANS AGAINST MUTUAL GUARANTEE WITH NO
CONDITION OF A SAVING FUND LIKE GRAMEEN BANK MODEL. ALL MEMBERS
SIGN A JOINT LIABILITY CONTRACT, MAKING EACH ONE JOINTLY LIABLE FOR
REPAYMENT OF ALL LOANS TAKEN BY ALL INDIVIDUALS IN THE GROUP WHICH
ACTS AS A SOCIAL COLLATERAL TO THE MFI. THIS PROVIDES ASSURANCE TO
THE MFI FOR THE TIMELY REPAYMENT OF LOAN AND PROPER UTILIZATION OF
FUNDS BY THE BORROWERS. THE JOINT LIABILITY GROUP CONCEPT HELPS THE
MICROFINANCE INSITUTIONS IN REDUCING THE DEFAULT RISK AND AT THE
SAME TIME INCULCATES THE HABIT OF DISCIPLINED MANAGEMENT OF
FINANCE AMONG THE POOR.

INDIVIDUAL LENDING MODEL IS NOT DEPENDANT ON ANY EMEBERSHIP OF AN

INDIVIDUAL TO ANY GROUP.THE MFIs OFFER LOANS DIRECTLY TO INDIVIDUAL
CLIENTS WHICH ARE ADAPTED AS PER THE NEED OF THE BORROWER. IN THIS
MODEL, MFIs HAVE TO ASSIGN A PERSON TO BE IN CLOSE CONTACT OF THE
INDIVIDUAL AND HELP HIM UNDERSTAND THE PROCESS INVOLVED IN THE
REPAYMENT AND ALSO TO ENSURE THAT THE LOAN IS UTILIZED IN A WAY
THAT GIVES RETURNS TO THE BORROWER. IT IS MOST SUCCESSFUL FOR
LARGER, URBAN-BASED, PRODUCTION-ORIENTED BUSINESSES. THE MODEL IS
FOLLOWED BY MANY FINANCIAL INSTITUTIONS LIKE THE ASSOCIATION FOR
THE DEVELPOMENT OF MICRO-ENTERPRISES IN DOMAIN REPUBLIC, BANK
RAKYAT, INDONESIA, SENEGAL EGYPT, SELF-EMPLOYMENT WOMEN’S
ASSOCIATION IN INDIA, ETC.

THE SELF HELP GROUP MODEL WAS INITIATED IN INDIA BY NATIONAL BANK
FOR AGRICULTURE AND RURAL DEVELPOMENT (NABARD) IN 1990s. NABARD
BASED THIS MODEL ON THE BASIS OF “SAVING FIRST” SO AS TO ENCOURAGE
THE HABIT OF SAVING IN POOR.FROM THE SAVINGS THEY CREATE A LOAN
FUND FROM WHERE THE GROUP CAN BORROW. THE GROUP CONSISTS OF 10-
20 MEMBERS OF WOMEN AND MEN WHO ARE FIRST ENCOURAGED TO DO
SAVINGS AND FROM THE SAME KITTY THE MEMBERS ARE LENT. THE ONE
MAIN ADVANTAGE OF SHG IS THAT THE MFIs INSTEAD OF DEALING WITH
INDIVIDUALS, DEALS WITH A GROUP CONSISTING OF MEMBERS WHICH BRING
DOWN THE TRANSACTION COST OF LENDING MONEY.

VILLAGE BANKING MODEL HAS BEEN INNOVATED BY THE GRAMEEN BANK AND
LATER DEVELOPED BY FINCA INTERNATIONAL FOUNDED BY JOHN HATCH. IN
THIS MODE INSTEAD OF CONTROLLING ALL THE TRANSACTIONS FROM THE
CENTRE, AN MFI HANDLES VERYTHING LOCALLY FOR VARIOUS VILLAGES.
THERE 31 MICROFINANCE INSTITUTIONS THAT HAVE COLLECTIVELY CREATED
OVER 800 VILLAGE BANKING PROGRAMS IN AT LEAST 90 COUNTIRES
CREDIT UNIONS AND COOPERATIVES IS A MEMBER OWNED FINANCIAL
COOPERATIVE DEMOCRATICALLY CONTROLLED BY ITS MEMBERS, AND
OPERATED FOR THE PURPOSE OF PROMOTING THRIFT, PROVIDING CREDIT AT
COMPETITIVE RATES, AND PROVIDING OTHER FINANCIAL SERVICES TO ITS
MEMBERS. MANY CREDIT UNIONS ALSO PROVIDE SERVICES INTENDED TO
SUPPORT COMMUNITY DEVELPOMENT OR SUSTAINABLE INTERNATIONAL
DEVELPOMENT ON A LOCAL LEVEL. ITS MEMBERS ARE USUALLY SHARING A
COMMON BOND AND THE LOAN IS USUALLY GIVEN OUT OF THE DEPOSITS BY
THE MEMBERS AND OUTSIDE BORROWING IS AVOIDED. THEY ARE USUALLY
THE SMALLER FORM OF COOPERATIVE BANKING INSTITUTION. IN SOME
COUNTRIES THEY CAN PROVIDE BUSINESS LOANS TO FARMERS, AND
MORTGAGES.
THE IMPACT OF MICROCREDIT IS A SUBJECT OF MUCH CONTROVERSY.
PROPONENTS STATE THAT IT REDUCES POVERTY THROUGH HIGHER
EMPLOYMENT AND HIGHER INCOMES. THIS IS EXPECTED TO LEAD TO
IMPROVED NUTRITION AND IMPROVED EDUCATION OF THE BORROWER’S
CHILDREN. SOME ARGUE THAT MICROCREDIT EMPOWERS WOMEN. IN THE US
AND CANADA, IT IS ARGUED THAT MICROCREDIT HELPS RECIPENTS TO
GRADUATE FROM WELFARE PROGRAMS.

CRITICS SAY THAT MICROCREDIT HAS NOT INCREASED INCOMES, BUT HAS
DRIVEN POOR HOUSEHOLDS INTO A DEBT TRAP, IN SOME CASES EVEN
LEADING TO SUICIDE. THEY ADD THAT MONEY FROM LOANS IS OFTEN USED
FOR DURABLE CONSUMER GOODS OR CONSUMPTION INSTEAD OF BEING
USED FOR PRODUCTIVE IVESTMENTS, THAT IT FAILS TO EMPOWER WOMEN,
AND THAT IT HAS NOT IMPROVED HEALTH OR EDUCATION. MOREOVER, AS
THE ACCESS TO MICRO-LOANS IS WIDESPREAD, BORROWERS TEND TO
ACQUIRE SEVERAL LOANS FROM DIFFERENT COMPANIES, MAKING IT NEARLY
IMPOSSIBLE TO PAY THE DEBT BACK. AS A RESULT OF SUCH TRAGIC EVENTS,
MICROFINANCE INSTITUTIONS IN INDIA HAVE AGREED ON SETTING AN
INTEREST RATE CEILING OF 15 PERCENT. THIS IS IMPORTAMT BEACUSE
MICROFINANCE LOAN RECIPENTS HAVE A HIGHER LEVEL OF SECURITY IN
REPAYING THE LOANS AND A LOWER LEVEL OF RISK IN FALLING TO REPAY
THEM.

UINTENDED CONSEQUENCES OF MICROFINANCE INCLUDE FROMAL

INTERMEDIATION. THAT IS, SOME ENTREPRENEURIAL BORROWERS BECOME
INFORMAL INTERMEDIARIES BETWEEN MICROFINANCE INITIATIVES AND
POORER MICRO-ENTREPRENEURS. THOSE WHO MORE EASILY QUALIFY FOR
MICROFINANCE SPLIT LOANS INTO SMALLER CREDIT TO EVEN POOR
BORROWERS.
 PRESENTATION OF DATA
ANALYSIS AND FINDINGS
THE SERVICES OFFERED UNDER MICROFINANCE INCLUDE SAVINGS, CREDIT,
INSURANCE, PAYMENT SERVICES AS WELL AS SOCIAL INTERMEDIATION LIKE
GROUP FORMATION, ETC. IN THE INDIAN SETTING, MICROFINANCE HAS BEEN
DEFINED AS ‘AN ECONOMIC DEVELPOMENT TOOL WHOSE OBJECTIVE IS TO
ASSIST THE POOR TO WORK THEIR WAY OUT OF POVERTY. IT COVERS A RANGE
OF SERVICES WHICH INCLUDE, IN ADDITION TO THE PROVISION OF CREDIT,
MANY OTHER SERVICES SUCH AS SAVINGS, MONEY TRANSFERS, COUNSELLING,
ETC.’

DESPITE HIGHER GDP GROWTH RATES ACHIEVED BY INDIA IN THE LAST

DECADE, OVER 350 MILLION RURAL INDIANS FACE CHRONIC POVERTY
(NABARD, 2015). THE 11th FIVE YEAR PLAN OF THE INDIAN GOVERNEMNT
AIMED AT INCLUSIVE GROWTH AND FASTER REDUCTION OF POVERTY.
FURTHER, THE 12th FIVE YEAR PLAN (2012-2017), PLANS REDUCE TO POVERTY I
THE COUNTRY BY 10% (2% ANNUALLY).(PLANNING COMMISSION,
GOVERNMENT OF INDIA, 2013).

THE MICROFINANCE ECOSYSTEM IN INDIA HAS THE FOLLOWING MAJOR

PLAYERS; CENTRAL AND STATE GOVERNMENTS, MICROFINANCE INSTITUTIONS
(MFIs), NON-GOVERNEMNTAL ORANIZATIONS (NGOs), SELF HELP GROUPS
(SHGs), BANKS (COMMERCIAL, RURAL, AND COOPERATIVES) AND GOVERNING/
PROMOTING AGENCIES LIKE RESERVE BANK OF INDIA, NABARD. THE MAJOR
MODES OF MICROFINANCE IN INDIA ARE: SUBSIDIZED BANK LOANS, SELF-HELP
GROUP, BANK LINKAGES, MICROFINANCE INSTITUTIONS-JOINT LIABILITY
GROUPS; DIRECT BENEFIT TRANSFERS AND COMMUNITY-BASED
MICROFINANCE INSTITUTIONS LIKE COOPERATIVES AND POST OFFICE BASED
SCHEMES. INDIA CURRENTLY HAS 76.97 LAKHS SHGs WITH 58% OF THEM
HAVE CREDIT OUTSTANDING (NABARD, 2015). FURTHER, APPROXIMATELY 268
MICROFINANCE INSTITUTIONS ARE KNOWN TO OPERATE IN THE COUNTRY.
(91 NON-BANKING COMPANIES AND 132 SOCIETIES/TRUSTS) 9SA-DHAN,
2014). THREE STATES WITH THE HIGHEST NUMBER OF MFIs ARE WEST
BENGAL(45), TAMIL NADU(33), AND ODISHA(29) (SA-DHAN, 2014).

IN INDIA, THE ELEVENTH FIVE YEAR PALN AIMED AT AN INCLUSIVE GROWTH

AND FASTER REDUCTION OF POVERTY (PLANNING COMMISSION,
GOVERNEMNT OF INDIA, 2013). THE PLANNING COMMISSION REPORT STATE
‘MICROFINANCE CAN CONTRIBUTE IMMENSELY TO THE FINANCIAL INCLUSION
OF THE POOR WITHOUT WHICH IT WILL BE DIFFICULT FOR THEM TO COME
OUT OF THE VICIOUS CYCLE OF POVERTY.’’ THERE IS A NEED TO STRENGHTHEN
ALL THE AVAILABLE CHANNELS OF PROVIDING CREDIT TO THE POOR SUCH AS
SHG-BANK LINKAGE PROGRAMMES, MICROFINANCE INSTITUTIONS,
COOPERATIVE BANKS, STATE FINANCIAL CORPORATIONS, REGIONAL RURAL
BANKS AND PRIMARY AGRICULTURAL CREDIT SOCIETIES IN ORDER TO ENABLE
THE POOR PEOPLE TO ACCESS CREDIT IS THE FACT WHICH HAS BEEN
ACKNOWLEDGED BY THE PLANNING COMMISSION REPORT OF 2013.
MICROFINANCE INSTITUTIONS WORK TOWARDS A DOUBLE BOTTOM LINE-
FINANCIAL AND SOCIAL- UNLIKE THE TYPICAL FORMAL FINANCIAL INSTITUTION
WHICH WORKS SOLELY TOWARD A FINANCIAL BOTTOM LINE. MEASURING
FINANCIAL RETURNS IS RELATIVELY STRAIGHT-FORWARD. MICROFINANCE HAS
BORROWED LIBERALLY FROM THE FINANCIAL ACCOUNTING AND
PERFORMANCE STANDARDS IN THE FORMAL FINANCIAL SECTOR. CONCEPTS
SUCH AS RETURN ON EQUITY, RETURN ON ASSETS, PORTFOLIO-AT-RISK, AND
SO FORTH ARE INCREASINGLY BECOMING THE LINGUA FRANCA OF THE
MICROFINANCE INDUSTRY. MEASURING SOCIAL RETURN, HOWEVER, IS
ANYTHING BUT STRAIGHTFORWARD. IN PRACTITCE, THE SPECIFIC IMPACTS OF
MICROFIBNANCE ARE HARD TO PIN DOWN AND HARDER STILL TO MEASURE.
IMPACT ASSESSMENTS REQUIRES ADOPTION OF RESEARCH METHODOLOGIES
CAPABLE OF ISOLATING SPECIFIC EFFECTS OUT OF A COMPLICATED WEB OF
CASUAL AND MEDIATING FACTORS AND HIGH DECIBELS OF RANDOM
ENVIRONMENT NOISE, AS WELL AS ATTACHING SPECIFIC UNITS OF
MEASUREMENT TO TANGIBLE AND INTANGIBLE IMPACTS THAT MAY OR MAY
NOT LEND THEMSELVES TO PRECISE DEFINITION OR MEASUREMENT.

THE DIFFICULTY AND COST INHERENT IN ASSESSING SOCIAL IMPACT ARE SUCH
THAT MOST MFIs DO NOT TRY TO ASSESS SOCIAL IMPACT; NONETHLESS,
DONORS AND POLICYMAKERS HAVE A LEGITIMATE INTEREST IN ASSESSING
THE SOCIAL RETURNS TO THEIR SOCIAL INVESTMENTS. SOME KNOWLEDGE OF
SOCIAL IMPACT SI THEREFORE NECESSARY FOR MFI MANAGEMENT AND
OTHER STAKEHOLDERS TO ASSESS OVERALL PROGRAM EFFECTIVENESS.

ANALYZING SOME PROGRAMS IT SHOWS THAT ASSTES AND INCOME

INCREASED COMMENSURATE WITH INITIAL POVERTY LEVELS, BUT ALSO THAT
MFI SERVICES MAY INCREASE VULNERABILITYIF BORROWERS OVER-LEVERAGE.
BOLNICK AND NELSON(1990) FIND THAT MFI PARTICIPATION HAD A POSITIVE
IMPACT ON ENTERPRISE THAT WERE TYPICALLY SMALL, LABOUR INTENSIVE
AND GROWING, ALTHOUGH THE IMPACT WAS FAR FROM UNIFORM ACROSS
SECTORS AND TARGET VARIABLES. IT WAS FOUND THAT BORROWERS WHO
WERE ABLE TO OBTAIN TWO LOANS EXPERIENCED HIGH GROWTH IN PROFITS
AND HOUSEHOLD INCOME COMPARED TO CONTROL SAMPLE, BUT
BORROWERS WHO NEVER QUALIFIEDFOR THE SECOND LOAN WERE ACTUALLY
WORSE OFF DUE TO MFI COLLECTION MECHANISMS.

WYDICK FINDS THAT UPWARD CLASS STRUCTURE MOBILITY INCREASES

SIGNIFICANTLY WITH ACCESS TO CREDIT. USING THE SAME DATA SET IN
SUBSEQUENT STUDY HE ALSO FINDS THAT RAPID GAINS IN JOB CREATION
AFTER INITIAL CREDIT ACCESS WERE FOLLOWED BY PROLONGED PERIODS OF
STAGNANT JOB CREATION. DUNN FINDS THAT PROGRAM CLIENTS’
ENTERPRISES PERFORMED BETTER THAN NON-CLIENT ENTERPRISES INTERMS
OF PROFITS, FIXED ASSTES, AND EMPLOYMENT. FINALLY, ANDERSON ET AL.
ANALYZE 147 MFIs AND FINDS THAT MICROFINANCE PARTICIPATION
INCREASED ENVIRONMENTAL AWARENESS AND COMMON POOL RESOURCE
STEWARDSHIP.

TWO PUBLISHED IMPACT STUDIES EXPLICITY ASSESSED COMMUNITY, OR

VILLAGE-LEVEL, IMPACTS.IN BANGLADESH KHANDEKER ET AL. FIND THAT
PROGRAM PARTICIPATION HAS POSITIVE IMPACTS ON HOUSEHOLD INCOME,
PRODUCTION, AND EMPLOYMENT, PARTICULARLY IN THE RURAL NON-FARM
SECTOR, AND THAT THE GROWTH IN SELF-EMPLOYMENT WAS ACHIEVED AT
THE EXPENSE OF WAGE EMPLOYMENT, WHICH IMPLIES AN INCREASE IN
RURAL WAGES. WOLLER AND PARSONS ESTIMATE THAT A MICROFINANCE
PROGRAM IN PORTOVIEJO, ECUADOR CONTRIBUTES $480,000 PER YEAR IN
DIRECT AND INCLUDED ECONOMIC BENEFITS TO THE LOCAL ECONOMY.

OTHER IMPACT STUDIES ADDRESS TRADE-OFFS THAT NEED TO BE

CONSIDERED WHEN PERFORMING MICROFINANCE IMPACT ASSESSMENTS.
MOSELY AND HULME STUDY 13 MFIs IN SEVEN COUNTRIES (BOLVIA,
INDONESIA, BANGLADESH, SRI LANKA, KENYA, INDIA AND MALAWI) AND
CONSTRUCT AN “IMPACT FRONTIER’ DECRIBING THE INVERSE RELATIONSHIP
THEY FIND BETWEEN OUTREACH AND IMPACT. WYDICK CONSTRUCTS A
THEORITICAL MODEL TO ANALYZE THE ECONOMIC TRADEOFF BETWEEN
FUTURE RETURNS TO SCHOOLING AND THE CURRENT RETURN TO CHILD
LABOUR IN HOUSEHOLD ENTERPRISES. HE FINDS THAT IN SOME STATES,
MICROCREDIT INCREASES THE PROBABILITY THAT CHILDREN WILL ATTEND
SCHOOL; HOWEVER, DURING CERTAIN STATES OF MORAL HAZARD,THE COST
OF SCHOOLING MAY OUTWEIGH THE BENEFITS OF CHILD LABOUR. KEVANE
AND WYDICK FIND THAT TARGETING MICROENTERPRISE CREDIT TO POOR
WOMEN APPEARS TO IMPLY A TRADE-OFF BETWEEN ECONOMIC GROWTH IN
FAVOR OF POVERTY REDUCTION AND CHILD WELFARE. IN PARTICULAR,
FEMALE ENTREPRENEURS OF CHILD BEARING AGE CREATE SIGNIFICANTLY
FEWER JOBS THAN MALE ENTREPRENEURS.

EACH OF THE IMPACT ASSESSMENT STUDIES CITED ABOVE, WITH ONE NOTED
EXCEPTION, PROVIDE EVIDENCE OF POSITIVE IMPACTS OF MICROFINANCE.
OTHER IMPACT ASSESSMENT STUDIES, HOWEVER, FAIL TO FIND SIGNIFICANT
IMPACTS. IN HIS ASESSMENT OF THAI MFIs, COLEMAN(1999) FINDS
THAT”NAIVE” ESTIMATES OF IMPACT FAILING TO CONTROL FOR SELF-
SELECTION AND ENDOGENEOUS PROGRAM THUS LEADING TO SYSTEMATIC
OVERSTATEMENT OF IMPACT.

MAKING COMPARISONS ACROSS IMPACT STUDIES IS GREATLY COMPLICATED

BY THE CONTEXTUAL HETEROGENEITY OF PROGRAMS ASSESSED AND THE
DIVERSITY OF EMPIRICAL METHODOLOGIES USED. THE DIVERSITY OF
EMPIRICAL METHODOLOGIES IN TURN REFLECTS THE DIVERSITY IN
METHODOLOGICAL OPTIONS AVAILABLE. HULME REVIEWS THE
METHODOLOGICAL OPTIONS FOR DOING IMPACT ASSESSMENTS IDENTIFYING
THREE BROAD APPROACHES; THE SCIENTIFIC METHOD, THE HUMANITIES
TRADITION, AND PARTICIPATORY LEARNING AND ACTION. HE CONCLUDES
THAT AN OPTIMAL IMPACT ASSESSMENT OBJECTIVES, PROGRAM CONTEXT,
HUMAN RESOURCES, AND TIMING.

HYMAN ALSO CONSIDER THE ISSUE OF OPTIMAL IMPACT ASSESSMENT

METHODS BY REVIEWING AND COMPARING FOUR MFI EVALUATION SYSTEMS.
THROUGH HIS ANALYSIS, HE SUGGESTS IMPROVED METHODS FOR EXISTING
ASSESSMENT APPROACHES. WOLLER ET AL. SURVEY 73 MFIs IN THE US AND
DEVELOPING COUNTRIES ON THEIR IMPACT EVALUATION PRACTICES. THEY
FIND THAT THE SAMPLED INSTITUTIONS REGULARLY EVALUATED THEIR
PROGRAMS, ALBEIT USING INEXPENSIVE AND UNSCIENTIFIC METHODS,
REGULARLY MONITORED PROJECT PERFORMANCE, SAW EVALUATIONS AS
VITAL, USED FINDINGS TO IMPLEMENT PROJECT CHANGES, AND SOUGHT
FORMAL FEEDBACK FROM CLIENTS. THE SURVEY FINDINGS ALSO SHED LIGHT
ON IMPEDIMENTS TO PERFORMING IMPACT ASSESSMENTS ON THE ROLE
PLAYED BY VARIOUS STAKEHOLDERS IN THE EVALUATION PROCESS.
IN ADDITION TO COLEMAN, OTHER STUDIES ADDRESS THE VARIOUS
METHODOLOGICAL WEAKNESSES FOUND IN PUBLISHED IMPACT STUDIES.
KARLAN CRITICIZES THE COMMON PRACTICE OF OMITTING EX-CLIENTS FROM
TREATMENT GROUPS, ARGUING THAT SUCH AN OMISSION INTRODUCES
SIGNIFICANT RISK OF SELECTION BIAS AND SURVIVORSHIP BIAS, POTENTIALLY
RESULTING IN SYSTEMATIC AND SIGNIFICANT OVERSTATEMENT OF PROGRAM
IMPACTS. SCHREINER CRITICIZES IMPACT ASSESSMENTS OF U.S.
MICROENTERPRISE DEVELPOMENT PROGRAMS FOR A VARIETY OF
METHODOLOGICAL FAILURES, INCLUDIND FAILURE TO USE VAILD CONTROL
GROUPS, BIASED SAMPLING, MISESTIMATION OF PROGRAM BENEFITS AND
COTS, AND FAILURE TO PERFORM TRUE COST-BENEFIT ANALYSES. MANY OF
THESE CRITICISMS ARE TRUE FOR ASSESSMENTS OF MICROFINANCE
PROGRAMS IN THE DEVELPOING WORLD AS WELL.
 IT ALLOWS PEOPLE TO BETTER PROVIDE FOR THEIR FAMILIES.
MICROFINANCE ALLOWS FOR AN ADDED LEVEL OF RESILIENCY IN THE
DEVELPOING WORLD. EVEN WHEN HOUSEHOLDS ARE ABLE TO WORK
THEIR WAY OUT OF POVERTY, IT OFTEN TAKES JUST ONE ADVERSE
EVENT TO SEND THEM RIGHT BACK INTO IT. IT IS OFTEN A HEALTH CARE
ISSUE THAT CAUSES A RETURN TO POVERTY. BY ALLOWING
ENTERPRENEURS TO BECOME MORE RESILIENT THROUGH THEIR OWN
EFFORTS AT THEIR OWN BUSINESS, IT GIVES THEM THE OPPURTUNITY
TO MAKE IT THROUGH TIMES OF ECONOMIC DIFFICULTY.
MOST OF THE HOUSEHOLDS THAT TAKE ADVANTAGE OF THE
MICROFINANCE OFFERS THAT ARE AVAILABLE IN DEVELPOING
COUNTIRES LIVE IN WHAT WOULD BE CONSIDERED “ABJECT POVERTY”.
THIS IS DEFINED AS LIVING ON $1.25 PER DAY OR LESS- THOUGH SOME
DEFINITIONS EXTEND THIS AMOUNT TO $2 PER DAY OR MORE. ABOUT
80% OF THAT AMOUNT GOES TO THE PURCHASE OR CREATION OF
FOOD RESOURCES.
BY OFFERING MICROFINANCE PRODUCTS THAT CAN BE REPAID WITH
THAT REMAINING 20%, MORE HOUSEHOLDS HAVE THE OPPURTUBITY
TO EXPAND THEIR CURRENT OPPURTUNITIES SO THAT MORE INCOME
ACCUMULATION MAY OCCUR.
 IT GIVES ACCESS TO CREDIT.
MUHAMMAD YUNUS WHO IS OFTEN CREDITED AS THE MODERN
FATHER O MICROFINANCE, ONCE GAVE $27 TO WOMEN OUT OF HIS
OWN POCKET BEACUSE HE SAW HOW THE CYCLE OF DEBT AFFECTED
THEIR WORK CRAFTING BAMBOO CHAIRS. MOST BANKS WILL NOT
EXTEND LOANS TO SOMEONE WITHOUT CREDIT OR COLLATERAL
BECAUSE OF THE RISKS INVOLVED IN DOING SO, YET THOSE IN POVERTY
DO NOT HAVE ANY CREDIT OR COLLATERAL.BY EXTENDING
MICROFINANCE OPPURTUNITIES, PEOPLE HAVE TO ACCESS TO SMALL
AMOUNT OF CREDIT, WHICH CAN THEN STOP POVERTY AT A RAPID
PACE.
 IT SERVES THOSE WHO ARE OFTEN OVERLOOKED IN SOCIETY.
 IN MANY DEVELPOING NATIONS, THE PRIMARY RECIPENT OF
MICROLOANS TENDS TO BE WOMEN. UP TO 95% OF SOME LOAN
PRODUCTS ARE EXTENDED MY MICROFINANCE INSTITUTIONS ARE
GIVEN TO WOMEN. THOSE WITH DISABILITIES, THOSE WHO ARE
UNEMPLOYED, AND EVEN THOSE WHO SIMPLY BEG TO MEET THEIR
BASIC NEEDS ARE ALSO RECIPENTS OF MICROFINANCE PRODUCTS THAT
CAN HELP THEM TAKE CONTROL OF THEIR LIVES.
WOMEN ARE KEY FIGURES IN LEADERSHIP ROLES IN BUSINESS, EVEN IN
THE DEVELPOED WORLD. CATALYST HAS REPORTED THAT ARE UP TO
66% BETTER IN RETURNS ON INVESTED CAPITAL AND 42% BETTER IN
TERMS OF SALES RETURNS THAN COMPANIES WITH MALE BOARD
MEMBERS ONLY.
WOMEN ALSO DEVELPO OTHERS MORE FREQUENTLY WHEN IT COMES
TO ENTREPRENEURIAL ROLES. THIS COMES FROM COACHING,
FEEDBACK, OR INVESTMENTS. EVEN IN THE DEVELOPED WORLD,
WOMEN HELPING WOMEN IS AN ECONOMIC FORCE THAT POVERTY
CAN’T STOP.
 IT OFFERS A BETTER OVERALL LOAN REPAYMENT RATE THAN
TRADITIONAL BANKING PRODUCTS.
WHEN PEOPLE ARE MPOWERED, THEY ARE MORE LIKELY TO AVOID
DEFAULTING ON A LOAN. WOMEN ARE ALSO STATISTICALLY MORE
LIKELY TO REPAY A LOAN THAN MEN ARE, WHICH IS ANOTHER REASON
WHY WOMEN ARE TARGETED INTHE MICROFINANCE WORLD. THERE’S
ALSO THE FACT THAT FOR MANY WHO RECEIVE A MICROLOAN. IT IS
THEIR ONLY REAL CHANCE TO GET THEMSELVES OUT OF POVERTY, SO
THEY ARE NOT GOING TO MESS THINGS UP.
A SURVEY SHOWS THAT THE MEAN PERCENTILE OF WOMEN DISPLAYING
THESE TRAITS WAS 55%, WHILE FOR MEN, IT WAS JUST 48%. IN
BUSINESS, THE BOTTOM LINE IS THIS; INTEGRITY MATTERS.
MICROFINANCE INSTITUTIONS HAVE RECOGNIZED THIS AND
APPROACHED WOMEN BECAUSE OF THIS.
AS A SIDE EFFECT OS THIS APPROACH, MANY DEVELOPING COUNTRIES
ARE TAKING A NEW LOOK AT WHAT ROLE WOMEN SHOULD PLAY IN
SOCIETY. INSTEAD OF TREATING A WOMEN AS A SECOND-CLASS-
CITIZEN, OR THE ‘BAREFOOT IN THE KITCHEN AND PREGNANT’ ATITTUDE
 THATS HAS BEEN PREVALENT IN THE PAST, THE SUCCESS OF WOMEN IN
BRING THEIR HOUSEHOLDS OUT OF POVERTY IS EVIDENCE THAT PROVES
WOMEN NOT ONLY HAVE AN INITIATIVE TO GET THINGS DONE, BUT
THEY PRODUCE CONSISTENT RESULTS.
FOR THESE REAONS, MICROFINANCE INSTITUTIONS SEE TOTAL
REPAYMENT RATES HIGHER THAN 98%, THOUGH THERE CAN BE
SEVERAL ACCOUNTS THAT ARE OVERDUE AT ANY GIVEN TIME.
 IT PROVIDES FAMILIES WITH AN OPPURTUNITY TO PROVIDE AN
EDUCATION TO THEIR CHILDREN.
CHILDREN WHO ARE LIVING IN POVERTY ARE MOST LIKELY TO HAVE
MISSED SCHOOL DAYS OR TO NOT EVEN BE ENROLLED IN SCHOOL AT
ALL. THIS IS BEACUSE THE MAJORITY OF FAMILIES WHO LIVE IN POVERTY
ARE WORKING IN THE AGRICULTURAL SECTOR. THE FAMILIES NEED THE
CHILDREN TO BE WORKING AND PRODUCTIVE SO THEIR FINANCIAL
NEED CAN BE MET. BY RECEIVING MICROFINANCING PRODUCTS, THERE
IS LESS OF A THREAT OF GOING WITHOUT FUNDING, AND THAT MEANS
MORE OPPURTUNITIES FOR CHILDREN TO STAY IN SCHOOL.
THIS IS ESPECIALLY IMPORTANT FOR FAMILIES WITH GIRLS. WHEN GIRLS
RECEIVES JUST 8 YEARS OF A FORMAL EDUCATION, THEY ARE FOUR
TIMES LESS LIKELY TO BECOME MARRIED YOUNG. THEY ARE LESS LIKELY
TO HAVE A TEEN PREGNANCY. IN RETURN,THIS MAKES GIRLS MORE
LIKELY TO FINISH SCHOOLING AND THEN EITHER OBTAIN A FAIR-PAYING
JOB OR GO ON TO A FURTHER EDUCATIONAL OPPURTUNITY.
 IT CREATES THE POSSIBILITY OF FUTURE INVESTMENTS.
THE PROBLEM WITH POVERTY IS THAT IT IS A CYCLE THAT PERPETUATES
ITSELF. WHEN THERE IS A LACK OF MONEY, THERE IS A LACK OF FOOD.
WHEN THERE IS A LACK OF CLEAN WATER, THERE IS A LACK OF
SANITARY LIVING CONDITIONS. WHEN PEOPLE ARE SUFFERING FROM
MALNUTRITION, THEY ARE LESS LIKELY TO WORK. A LACK OF
SANITATION CREATES THE POTENTIAL OF ILLNESS THAT PREVENTS
WROKING DAYS.
MICROFINANCE CHANGES THIS BY MAKING MORE MONEY AVAILABLE.
WHEN BASIC NEEDS ARE MET, FAMILIES CAN THEN INVEST INTO BETTER
WELLS, BETTER SANITATION, AND AFFORD THE TIME IT MAY TAKE TO
ACCESS THE HEALTH CARE THEY NEED.
 AS THESE BASIC NEEDS ARE MET, IT ALSO MEANS THAT THERE ARE
FEWER INTERRUPTIONS TO THE ROUTINE. PEOPLE CAN STAY MORE
PRODUCTIVE. KIDS CAN STAY IN SCHOOL MORE CONSISITENTLY. BTTER
HEALTHCARE CAN BE OBTAINED.
AND WHEN THAT HAPPENS, THE POSIBILITY OF FUTURE INVESTMENTS
WILL OCCUR BECAUSE THERE IS MORE CONFIDENCE IN BEING ABLE TO
MEET BASIC NEEDS.
 IT IS A SUSTAINABLE PROCESS.
HOW MUCH RISK IS THERE WITH A $100 LOAN? SOME INVESTORS
MIGHT PAY THAT FOR A DECENT DINNER SOMEWHERE. YET$100 COULD
BE ENOUGH FOR AN ENTREPRENEUR IN A DEVELOPING COUNTRY TO
PULL THEMSELVES OUT OF POVERTY. THIS SMALL LEVEL OF WORKING
CAPITAL IS SUSTAINABLE BECAUSE IT’S ESSENTIALLY A FORGETABLE
AMOUNT.
IF THERE IS A DEFAULT ON THAT MONEY, THE INTEREST AND HIGH
REPAYMENT RATES OF OTHER MICROLOANS WILL MAKE UP FOR IT.
THEN REPAYMENTS ARE REINVESTED INTO COMMUNITIES SO THAT THE
BENEFITS OF MICROFINANCE CAN BE CONTINUALLY ENHANCED. EACH
REPAYMENT BECOMES THE FOUNDATION OF ANOTHER POTENTIAL
LOAN.
THIS IS WHY MANY MICROFINANCE PRODUCTS HAVE RELATIVELY HIGH
INTEREST RATES. SOME INSTITUTIONS MAY CHARGE THE
EQUIVALENTOF A 20% APR, BUT OTHERS HAVE INTEREST RATES WHICH
EXCEED 800%. ALTHOUGH INTEREST IS HIGH, RECIPIENTS ARE INVESTED
INTO MAKING THESE PRODCUTS WORK BECAUSE VIRTUALLY ALL
INSTITUTIONS PUT REPAYMENTS BACK INTO NEW LOANS THAT TARGET
THE MOST VULNERABLE HOUSEHOLDS IN THE DEVELOPING WORLD.
 IT CAN CREATE REAL JOBS.
MICROFINANCE IS ALSO ABLE TO LET ENTREPRENEURS IN DEVELOPING
COUNTRIES BE ABLE TO CREATE NEW EMPLOYMENT OPPURTUNITIES
FOR OTHERS. WITH MORE PEOPLE ABLE TO WORK AND EARN AN
INCOME, THE REST OF THE LOCAL ECONOMY ALSO BENEFITS BECAUSE
THERE ARE MORE REVENUES AVAILABLE TO MOVE THROUGH LOCAL
BUSINESSES AND SERVICE PROVIDERS.
 IT’S NOT JUST THE ENTREPRENEURIAL LEVEL THAT BENEFITS FROM JOB
CREATION THROUGH MICROFINANCE. GRAMEEN BANK IN BANGLADESH
EMPLOYS OVER 21,000 PEOPLE AND THEIR PRIMARY FINANCIAL
PRODUCTS ARE RELATED TO MICROFINANCE. THAT’S TEN OF
THOUSANDS OF JOBS THAT ARE CREATED BY THE INDUSTRY WITH THE
SOLE PURPOSE OF BEING ABLE TO DRAG PEOPLE UP AND OUT OF
POVERTY.
 IT ENCOURAGES PEOPLE TO SAVE.
MICROLOANS ARE AN IMPORTANT COMPONENT OF MICROFINANCE,
BUT SO IS SAVING MONEY. WHEN PEOPLE HAVE THEIR BASIC NEEDS
MET, THE NATURAL INCLINATION IS FOR THEM TO SAVE THE LEFTOVER
EARNINGS FOR A FUTURE EMERGENCY. THIS CREATES THE POTENTIAL
FOR MORE INVESTMENTS AND ULTIMATELY EVEN MORE INCOME FOR
THOSE WHO ARE DEVELOPING THE WORLD.
SOME MICROFINANCE INSTITUTIONS HAVE SEEN AN EXTRAORDINARY
NUMBER OF SAVINGS OCCUR WHEN PRODUCTS ARE EXTENDED. THE
UNIT DESAI OF BANK RAKYAT INDONESIA COUNTS 28 MILLION SAVERS
TO JUST 3 MILLION MICROLOAN BORROWERS.
NOW SAVING ISN’T ALWAYS SEEN, ESPECIALLY FROM BORROWERS, BUT
THIS IS PART OF THE EXPECTED MICROFINANCE PROCESS. SMALL LOANS
MAKE SMALL FINANCIAL IMPROVEMENTS FOR HOUSEHOLDS LIVING IN
POVERTY. THE DIFFERENCE BETWEEN MAKING $1.90 PER DAY AND
$2.30 PER DAY IS NOT MUCH IN REALITY, BUT BY DEFINITION, THAT
AMOUNT TAKES SOMEONE OUT OF EXTREME POVERTY.

INSTEAD OF BIG IMPROVEMENTS, MICROFINANCE ALLOWS FOR SMALL

IMPROVEMENTS. WHEN ENOUGH OF THOSE IMPROVEMENTS OCCUR,
THEN THERE IS A SAFE PLACE FOR PEOPLE TO STORE THEIR INCOME
THANKS TO THIS INDUSTRY.
 IT REDUCES STRESS.
THERE IS VALID ARGUMENT TO BE MADE RTHAT SOME MICROLOANS
GO TO COVER HOUSEHOLD EXPENSES INSTEAD OF BUSINESS NEEDS.
SOME ARE USING THESE LOANS TO PAY BILLS OR PURCHASE FOOD. IT’S
TRUE. YET WITHOUT THIS PRODUCT AVAILABLE, THERE WOULDN’T BE
AN ABILITY TO PAY BILLS OR PURCHASE FOOD. SO EVEN THOUGH IT
 MAY NOT ALWAYS BE USED FOR BUSINESS PURPOSES, IT STILL SERVES A
PURPOSE BY REDUCING STRESS.
STRESS CANNOT BE UNDERESTIMATED WHEN IT COMES TO POVERTY.
EVEN IN THE DEVELOPING WORLD, THE STRESSES OF POVERTY CAN BE
OVERWHELMING. IT CAUSES PEOPLE TO SEEK OUT COPING
MECHANISMS THAT ARE NOT ALWAYS HEALTHY. AND, IN SOME CASES,
IT MAY EVEN CAUSE FAMILIES TO BREAK APART.
SOMETIMES CHILDBIRTH IS A COPING MECHANISM FOR POVERTY
SIMPLY BECAUSE AN EXTRA SET OF HANDS MEANS AN EXTRA CHANCE
FOR INCOME. BY REDUCING THESE STRESS MARKERS, HOUSEHHOLDS
CAN FOCUS ON THE JOB AT HAND TO PROVIDE FOR THEMSELVES, EVEN
IF THAT MEANS NET INCOME LEVELS FOR THAT FAMILY MAY NOT RISE
IN THE NEAR FUTURE.
 IT ALLOWS PEOPLE TO FEEL LIKE THEY MATTER.
THE FEELING OF RECEIVING A CREDIT PRODUCT FOR THE FIRST TIME
CANNOT BBE IGNORED. IT’S A FEELING LIKE YOU’VE MADE IT. THAT YOU
REALLY ARE SOMEBODY BECAUSE YOU’VE BEEN TRUSTED WITH CREDIT.
THIS FEELING APPLIES TO EVERYONE, EVEN IN THE DEVELOPED WORLD.
WHEN A PERSON FEELS LIKE THEY MATTER, IT CHJANGES WHO THEY
ARE AT A CORE LEVEL. INSTEAD OF FOCUSING ON HOW THEY CAN JUST
SURVIVE, THEN BEGIN TO LOOK FOR WAYS TO THRIVE.
THIS BRINGS US BACK TO THE STRESS THAT POVERTY CREATES ON
PEOPLE. PEOPLE, WHEN THEY ARE APPROVED FOR A MICROLOAN FOR
THE FIRST TIME, WILL OFTEN HAVE A REACTION THAT IS SIMILAR TO
STEVE MARTIN’S REACTION IN THE JERK WHEN HE DISCOVERED HIS
NAME IN THE PHONE BOOK.
AND THIS IS WHY YUNUS FEELS THAT CREDIT IS A FUNDAMENTAL RIGHT.
WITHOUT CREDIT, SURVIVAL IS OFTEN THE BEST POSSIBLE OUTCOME.
WITH CREDIT, THERE IS HOPE THAT ANYTHING CAN BE POSSIBLE.
 IT OFFERS SIGNIFICANT ECONOMIC GAINS EVEN IF INCOME LEVELS
REMAIN THE SAME.
THE GAINS FROM PARTICIPATION IN A MICROFINANCE PROGRAM
INCLUDING ACCESS TO BETTER NUTRITION, HIGHER LEVELS OF
CONSUMPTION, AND CONSUMPTION SMOOTHING. THERE IS ALSO AN
UNMEASURABLE EFFECT WHICH OCCURS WHEN WOMEN ARE
EMPOWERED TO DO SOMETHING IN THEIR SOCIETY WHEN THEY MIGHT
NOT NORMALLY BE ALLOWED TO DO SO. AS SPENDING OCCURS, THESE
BENEFITS ALSO EXTEND OUTWARD TO THOSE WHO MAY NOT BE
PARTICIPATING IN THE PROGRAM SO THAT THE ENTIRE COMMUNITY
BENEFITS.
THE MOST IMPORTANT WEAKNESS OF MICROFINANCE IS THAT THE
EFFECTS OF RAISING INCOME LEVELS FOR THE POOR CAN OFTEN BE
QUESTIONABLE. ALTHOUGH IT RAISES THE POSSIBILITY OF INCOME
ACCUMULATION AND SAVINGS, MICROFINANCE PRODUCTS ALSO RAISE
THE POSSIBILITY OF CREATING A FURTHER INDEBTNESS THAT MAY
POTENTIALLY EXTEN THE CYCLES OF POVERTY FOR AN INFINITE PERIOD
OF TIME.
ALTHOUGH SOME MAY LOOK AAT CONSUMPTION IN A NEGATIVE VIEW,
THOSE WHO HAVE GONE WITHOUT FOR SO LONG WILL SEE IMPROVED
CONSUMPTION AS A SIGN THAT THINGS ARE GETTING BETTER.
CONSUMPTION SMOOTHING ALLOWS AN ENTIRE COMMUNITY TO
REALIZE THE BENFITS THAT MICROFINANCE CAN PROVIDE.
IT ISN’T ALWAYS ABOUT THE MONEY. SOMETIMES ECONOMIC SUCCESS
COMES FROM STABILITY.
YET IF YOU WERE TO ASK THE AVERAGE PERSON WHO WAS THE
RECIPIENT OF A MICROLOAN HOW THEY FELT ABOUT THE EXPERIENCE,
YOU WOULD BE TOLD THAT THEY WERE HAPPY THE LOAN WAS
AVAILABLE. THIS HAPPINESS IS REFLECTED IN THE HIGH PAYMENT RATES
THAT ARE ALMOST ALWAYS SEEN IN PROGRAMS OFFERED WITHIN
DEVELOPING COUNTIRES.THAT IN ITSELF SHOWS THAT THE BENEFITS OF
MICROFINANCE, AT A CORE LEVEL, ARE ALMOST LEAVING A POSITIVE
EFFECT.
 MICROFINANCE HELPS WOMEN. THAT’S GOOD, BUT NOT GOOD
ENOUGH TO TRANSFORM COMMUNITIES. COMMUNITIES ARE FORMED
OF EQUAL PARTS OF MEN AND WOMEN, WHO HAVE A STRONG
AFFINITY FOR FORMING BONDS WITH EACH OTHER. DEVELPOMENT
THAT HELPS WOMEN BUT DOESN’T INVOLVE MEN HAS A NATURAL SELF-
LIMITATION. YOU CAN’T HAVE TRANSFORMATIONAL COMMUNITY
DEVELPOMENT WITHOUT TRANSFORMING MEN AND WOMEN.
 MICROFINACE IS SMALL SCALE. TRUE, SMALL BUSINESSES BECOME
LARGE BUSINESSES SOMETIMES. BUT MORE OFTEN THEY DON’T. A
FAMILY MAY BE GREATLY HELPED BY THE EXTRA INCOME FROM SELLING
SANDALS AT THE MARKET. CREATING SOMETHING LARGER, SOMETHING
THAT FULLY SUPPORTS THE FAMILY AND CREATES JOBS, IS RARE.
 MICROCREDIT LOANS ARE EXPENSIVE. INTEREST RATES CHARGED BY
MICROFINANCE PROGRAMS ARE OFTEN OVER 20%. THEY HAVE TO BE,
BECAUSE OVERHEAD IS HIGH FOR ADMINISTERING TINY LOANS. THAT
MEANS IT’S HARD FOR BORROWERS TO MAKE ENOUGH PROFIT TO
REALLY GET AHEAD, AFTER THEY PAY LOAN COSTS.

CERTAINLY ALL MICROFINANCE ORGANIZATIONS TELL AMAZING

STORIES OF FAMILY TRANSFORMATION.
IN EVERY COMMUNITY, WHETHER RICH OR POOR, THERE ARE A FEW
PEOPLE WHO ARE NATURALLY CURIOUS, ADVENTUROUS, AND
ADAPTIVE. THEIR LIVES MAY BE INDISTINGUISHABLE FROM THEIR
NEIGHBOUR’S BECAUSE THERE HAS BEEN SO FEW OPPURTUNITIES IN
THEIR COMMUNITY. BUT AS SOON AS SOME OUTSIDE FORCE COMES
INTO THE NEIGHBOURHOOD, THEY SEE OPPURTUNITIES AND TAKE
THEM.
 MICROFINANCE INSTITUTIONS CAN BE OFTEN VIEWED AS A
PROFIT MAKING ORGANIZATION. THE DESIRE TO MAKE MFIs AN
INDUSTRY, COMMERCIALIZE MICRO-LENDING OR ENABLE THEM
TO BE A PROFIT MAKING INSTITUTIONS SHOULD NOT DISTRACT
THEM FROM ONE IMPORTANT ASPECT FOR WHICH THEY ARE
FORMEDIN THE FIRST PLACE; SOCIAL SERVICE BY ENABLING POOR
TO WORK ON PROFIT MAKING PROJECTS OR SMALLBUSINESSES.
MANY A TIMES, THE LACK OF THIS ASPECT CAN LEAD THE
MICROFINANCE INSTITUTIONS TO BEHAVE SIMILAR TO THE LOCAL
MONEYLENDERS.
CORRUPTION IS ANOTHER ETHICAL PROBLEM. MANY MFIs IN
INDIA OR ELSEWHERE IN WORLD SUFFER FROM CORRUPTION AT
VARIOUS LEVELS; CORRUPTION IN THE MFI ITSELF,CORRUPTION
IN THE MICRO ENTERPRISES, THESE MFIs SUPPORT OR CORRUPT
CHANNELS, OFFICIALS OR INDIVIDUAL SERVICE PROVIDERS.
 MANAGERIAL REASONS:
ONE OF THE MAJOR PROBLEMS WHICH THE MFIs CAN RESOLVE IS
MANAGERIAL PROBLEMS. MANAGERIAL PROBLEMS ARE A MAJOR
FACTOR AND THEY HAVE MORE EFFECTS THAN ANY OTHER
PROBLEMS DISCUSSED. POOR RECORD KEEPING AND LACK OF
MANAGERIAL CAPACITY ARE THE MAJOR PROBLEMS. FOR OFFICE
BEARERS AND GROUP MEMBERS, RECORD KEEPING SEEMS LIKE A
WASTE OF TIME. LACK OF RECORD KEEPING CAN HAVE ITS SHARE
OF PROBLEMS INCLUDING INCREASE IN DEFAULTERS.
 LEGAL REASONS:
MICROFINANCE INSTITUTIONS CAN BE VIEWED AS A SOCIAL
ORGANIZATION HELPING THE POOR AND A PROFIT
ORGANIZATION TOO. IN MANY COUNTRIES, PROFIT
ORGANIZATIONS ARE REGISTERED UNDER DIFFERENT SET OF ACTS
AND NON-PROFIT ORGANIZATIONS COME UNDER DIFFERENT
LEGISLATIONS. THESE LEGALITIES SOMETIMES CREATE
COMPLICATIONS. BUT A CHARITABLE INSTITUTION IS NOT
ALLOWED TO INDULGE IN TO MONEY LENDING. THE ABOVE CASE
WAS A LACK OF A LEGISLATION ESPECIALLY SERVING
 MICROFINANCE INSTITUTIONS. THERE ARE SOME RANDOME ACTS
WHICH PROHIBIT THE GROWTH OF MICROFINANCE INSTITUTIONS
AND DELIMIT THEIR IMAPCT.
 “UNFORTUNATE REASONS”:
SOMETIMES MICROFINANCE INTITUTIONS HAVE TO FACE
PROBLEMS WHICH CANNOT BE RESOLVED. THESE PROBLEMS
ARISE IN CASES WHEN SOMETHING “UNFORTUNATE” HAPPENS
TO A PERSON OR COMMUNITY. PERSONAL PLIGHTS ARE ANOTHER
REASON WHICH MIGHT AFFECT THE MFI.
 OTHER REASONS:
THERE ARE VARIOUS OTHER FACTORS FOR THE FAILURE OF MFI.
THEY CAN BE LISTED AS FOLLOWS: LACK OF VISION IS A FACTOR
WHICH PUSHES NEW MFIs IN TO EXTINCTIONS. MFIs NEED
TRAINED STAFF TO OPERATE. IN SEVERAL CASES, DROP OUT OF
TRAINED STAFF IS VERY HIGH WHICH REDUCES THE REACH OF AN
MFI. FURTHERMORE, THE “DROPPING OUT” RATE IS MORE THAN
THE “COMING IN” RATE. MFIs SERVE SOCIETY BUT THEY ARE ASLO
A PROFIT-MAKING INSTITUTION. IN MANY CASES, MFIs ACHIEVE A
LOT OF SUCCESS IN THEIR PROGRAMS IN INITIAL PERIOD, BUT
THEY FAIL TO MAINTAIN THE SAME RECORD IN THE LONG RUN
BECAUSE OF LACK OF PROPER COMMERCIAL ORIENTATION, THUS
MAKING THEM UNSUSTAINABLE.
IN A JOINT FACT-FINDING STUDY ON MICROFINANCE CONDUCTED BY THE
RESERVE BANK OF INDIA AND A FEW MAJOR BANKS, THE FOLLOWING
OBSERVATIONS WERE MADE:-

 SOME OF THE MICROFINANCE INSTITUTIONS FINANCED BY BANKS OR

ACTING AS THEIR INTERMEDIARIES OR PARTNERS APPEAR TO BE
FOCUSING ON RELATIVELY BETTER BANKED AREAS, INCLUDING AREAS
COVERED BY THE SHG-BANK LINKAGE PROGRAMME. COMPETING MFIs
WERE PERATING IN THE SAME AREA, AND TRYING TO REACH OUT TO
THE SAME SET OF POOR, RESULTING IN MULTIPLE LENDING AND
OVERBURDENING OF RURAL HOUSEHOLDS.
 MANY MFIS SUPPORTED BY BANKS WERE NOT ENGAGING THEMSELVES
IN CAPACITY BUILDING AND EMPOWERMENT OF THE GROUPS TO THE
DESIRED EXTENT. THE MFIs WERE DISBURSING LOANS TO THE NEWLY
FORMED GROUPS WITHIN 10-15 DAYS OF THEIR FORMATION, IN
CONCERNED TO THE PRACTICE OBTAINING IN THE SHG-BANK LINKAGE
PROGRAMME, WHICH TAKES ABOUT SIX TO SEVEN MONTHS FOR
GROUP FORMATION AND NURTURING. AS A RESULT, COHENSIVENESS A
SENSE OF PURPOSE WERE NOT BEING BUILT UP IN THE GROUPS
FORMED BY THESE MFIs.
 BANKS, AS PRINCIPAL FINANCIERS OF MFIs, DO NOT APPEAR TO BE
ENGAGING THEM WITH REGARD TO THEIR SYSTEMS, PRACTICES AND
LENDING POLICIES WITH A VIEW TO ENSURING BETTER TRANSPARENCY
AND ADHERENCE TO BEST PRACTICES. MANY CASES, NO REVIEW OF MFI
OPERATIONS WERE UNDERTAKEN AFTER SANCTIONING THE CREDIT
FACILITY.
AN INCREASING NUMBER OF MICROFINANCE INSTITUTIONS ARE
SEEKING NON-BANKING FINANCE COMPANY STATUS FROM RBI TO GET
WIDE ACCESS TO FUNDING, INCLUDING BANK FINANCE.
THE TASK FORCE ON SUPPORTIVE POLICY AND REGULATION
FRAMEWORK FOR MICROFINANCE SET UP BY NABARD IN 1999
PROVIDED VARIOUS RECOMMENDATIONS. ACCORDINGLY, IT WAS
DECIDED TO EXEMPT NBFCs WHICH ARE ENGAGED IN MICRO-
FINANCING ACTIVITIES, LICENSED UNDER SECTION 8 OF THE COMPANIES
ACT, 2013, AND WHICH DO NOT ACCEPT PUBLIC DEPOSITS, FROM THE
PURVIEW OF SECTIONS 45-IA (REGISTRATION), 45-IB (MAINTANENCE OF
LIQUID ASSETS), AND 45-IC (TRANSFER OF PROFITS TO THE RESERVE
FUND) OF THE RBI ACT, 1934.
 CONCLUSION
THERE IS A MOUNTING HOPE THAT MICROFINANCE CAN BE LARGE SCALE
POVERTY ALLEVIATION TOOLS FOR DECADES INDIA’S POOR HAVE BEEN LEFT
OUT OF THE REACH OF THE BANK LOANS. BUT OUT OF NECESSITY AND
ENTERPRISE; THOSE LOCKED OUT OF THEBANKING WORLD HAVE FIND A WAY
OUT. IN INDIA, THIS HAS BEEN WORKED OUT BY SELF-HELP GROUPS.
GLOBALLY IT IS SLOWLY PROVING ONE OF THE MOST EFFECTIVE STRATEGIES
TO REMOVE POVERTY. BANKS TOO ARE SHEDDING THEIR OLDRELUCTANCE TO
LEND TO THE POOR, AND ARE LOOKING TO TAP THE EXPERTISE OF
MICROCREDIT GROUPS TO CREATE A NEW AMERKET WHICH HAS BEEN
EMPATHETICALLY POINTED OUT IN THE CURRENT STUDY.

I UNDERTOOK THIS PROJECT MAINLY TO FOCUS ON HOW MICROFINANCE

INSTITUTIONS ARE CONTROLLING THE LEVELS OF POVERTY.

HOWEVER, IT WAS SEEN THAT MICROFINANCE IS ALL ABOUT HOW BANK AND
GOVERNMENT INSTITUIONS HELP THE BACKWARD CLASS AND ENCOURAGE
THEIR SAVINGS, AND PROVIDE THEIR BANKING KNOWLEDGE.
IN INDIA SHGs PRESENT A UNIQUE APPROACH TO FINANCIAL
INTERMEDIATION. THE APPROACH COMBINES ACCESS TO LOW-COST
FINANCIAL SERVICES WITH A PROCESS OF SELF MANAGEMENT AND
DEVELOPMENT FOR THE WOMEN WHO JOIN AS MEMBERS OF A SHG. THE
SHGs ARE FORMED AND SUPPORTED USUALLY BY NGOs, OR (INCREASINGLY)
BY GOVERNMENT AGENCIES AND SOMETIMES DIRECTLY BY BANKS. SHGs ARE
LINKED TO BANKS FIRST WITH A GROUP DEPOSIT ACCOUNT, THEN FOR
CREDIT, WHICH IS DISBURSED TO THE GROUP AND IN TURN DISTRIBUTED TO
THE MEMBERS. THERE IS A PROCESS OF GROUP FORMATION AND THE GROUP
LEADERS AND MEMBERS OF TRAINED ON MANAGING THE SAVINGS AND
CREDIT. OFTEN TOO SHGs ARE LINKED TO WIDER DEVELOPMENT OR
COMMUNITY PROGRAMMES. SHGs ARE THUS SEEN TO CONFER MANY
BENEFITS, BOTH ECONOMIC AND SOCIAL, PROVIDING NEW AND REAL
OPPORTUNITIES FOR RURAL WOMEN THAT CHALLENGE THE TRADITIONAL
BARRIERS THAT WOMEN FACE. SHGs ENABLE WOMEN TO GROW THEIR
SAVINGS AND ACCESS THE CREDIT WHICH BANKS ARE INCREASINGLY WILLING
TO LEND.

SHGs CAN ALSO BE COMMUNITY PLATFORMS FROM WHICH WOMEN BECOME

ACTIVE IN VILLAGE AFFAIRS, STAND FOR LOCAL ELECTION OR TAKE ACTION TO
ADDRESS SOCIAL OR COMMUNITY ISSUES.

SHG NUMBERS HAVE GROWN RAPIDLY SINCE 2000, ACROSS INDIA FIRST IN
THE MORE DEVELPOED SOUTH, NOW TOO IN THE NORTH. THE SHG ‘BANK-
LINKAGE’ PROGRAMME IS THE FLAGSHIP MICROFINANCE PROGRAMME OF
THE NATIONAL BANK FOR AGRICULTURE AND RURAL DEVELPOMENT
(NABARD) WHICH HAS ACTIVELY SUPPORTED THE DEVELPOMENT OF THIS
PROGRAMME SINCE THE EARLY 1990s. FOR SOME TIME, NABARD’S WEBSITE
ANNOUNCED; MORE THAN 400 WOMEN JOIN THE SHG MOVEMENT IN INDIA
IN EVERY HOUR.

BUT, AS WITH MUCH OF MICROFINANCE EVERYWHERE, SO WITH SHGs

ALONGSIDE THE GROWTH NUMBERS ARE ALSO INCREASED. MFIs DO USUALLY
PUBLISH INFORMATION ABOUT THEIR FINANCIAL PERFORMANCE. SOME MFIs
ARE ALSO BEGINNING TO REPORT ON THEIR SOCIAL PERFORMANCE. BUT IN
THE CASE OF SHGs, THERE IS LITTLE INFORMATION, EVEN ON FINANCIALS.
EVEN THE GROWTH AND PORTFOLIO DATA REPORTED BY NABARD, AT THE
TIME WE STARTED THE STUDY FOR THIS BOOK, WERE CUMULATIVE RATHER
THAN ANNUAL.
 POOR THE INDIVIDUAL RESOURCES AND SAVINGS, WHICH THE BANKING
SYSTEM FAILS DO (DUE TO INADEQUATE BANKING SYSTEMS IN INDIA).
 FACILITATES THE MEMBERS TO EMPLOY THEMSELVES IN NUMEROUS
SELF-EMPLOYMENT OPPORTUNITIES.
 HELPS IN RAISING THE LIVING STANDARDS OF THE CONCERNED
MEMBERS.
 REDUCE THE DEPENDENCE ON THE INFORMAL CREDIT SOURCES.
 DUE TO THIS PANDEMIC SITUATION, INDIA EXPANED ITS LIST TO ALLOW
NON-BANK LENDERS TO RESUME OPERATIONS FROM APRIL 20, AIMING
TO KICK-START THE ECONOMY. NOT ONY THAT, BUT THE NATION’S
CENTRAL BANK ALSO STEPPED IN TO BOOST LIQUIDITY AND SUPPORT
THE BATTERED SECTOR.
REVISED GUIDELINES ISSUED ON APRIL 15, NON-BANK LENDERS,
INCLUDING HOUSING FINANCE COMPANIES AND MICROFINANCE
INSTITUTIONS ARE ALLOWED TO RESUME OPERATIONS WITH BARE
MINIMUM STAFF, ACCORDING TO AN ORDER BY MINISTRY OF HOME
AFFAIRS.
ALL INDIA FINANCIAL INSTITUTIONS SUCH AS NABARD, SIDBI AND THE
NATIONAL HOUSING BANK WILL BE PROVIDED WITH Rs.50000 CRORE AT
THE REPO RATE.
 OF THIS, NABARD HAS BEEN ALLOCATED Rs.25000 CRORE TO ENABLE
REFINANCING OF REGIONAL RURAL BANKS, COOPERATIVE BANKS AND
MICROFINANCE INSTITUTIONS.
 THE SMALL INDUSTRIES DEVELOPMENT BANK OF INDIA HAS BEEN GIVEN
Rs.15000 CRORE FOR ON-LENDING AND REFINANCING TO SCHEDULED
COMMERCIAL BANKS, NON-BANKS AND MICROFINANCE INSTITUTIONS.
 THE NATIONAL HOUSING BANK WILL RECEIVE Rs.10000 CRORE TO
SUPPORT HOUSING FINANCE COMPANIES.
THE PANDEMIC AND ITS MULTI-PRONGED EFFECTS ARE NO MORE A
SECRET TOPIC FOR ANY COUNTRY AROUND THE GLOBE.
MICROFINANCE SECTOR GOT HIT BY THIS PANDEMIC AND IS FACING
ANOTHER BIG CRISIS AFTER 2010 AP AMMENDMENT BILL AND 2016’S
DEMONETISATION. SMALL AND MICRO LOANS SERVE LARGE SEGMENT
OF POPULATION RUNNING SMALL AND MICRO ENTERPRISES MOSTLY IN
UNORGANISED LIVELIHOOD DOMAINS. THESE FINANCIAL INSTITUTIONS
PLAY A KEY ROLE BETWEEN COMMERCIAL LENDING INSTITUTIONS
READY TO TAKE MODERATE RISK FOR BETTER RETURNS AND CLIENTS
WHO ARE IN NEED OF NON-COLLATERISED LOANS TO FINANCE THEIR
LIVELIHOOD ACTIVITY.
LATEST REPORT PUBLISHED BY MFIN, SHOWS THAT AS ON THE SECTOR
CATERS 3.22 CRORE CLIENTS WITH GROSS LOAN PORTFOLIO OF
Rs.74371 CRORE. THIS CONVERTS TO AVERAGE LOAN AMOUNT OF
Rs.22000 PLUS FOR ALL ACTIVE ACCOUNTS, WHICH SHOWS 6% ICREASE.
THE SECTOR HOLS A STRONG POSITION, WHEN IT COMES TO RETURN
ON INVESTMENT IN MONETARY AND SOCIAL RETURNS. THE AMOUNT
OF MONEY DEPLOYED IN THIS INDUSTRY REACHES OUT HUGE NUMBER
OF CUTOMERS, WITH SUSTAINABLE AND TRACEABLE LIVELIHOOD
OPTIONS AND MAKING IT MORE IMPACTFUL FOR SOCIAL SCIENTISTS
AND FOR FINANCIAL INVESTORS. THE REPORT ALSO MENTIONS THAT
THE INDUSTRY RECEIVED Rs.42140 CRORE AS DEBT AND Rs.16140
CRORE AS EQUITY WHICH IS 33% HIGHER THAN PREVIOUS YEAR,
SHOWING INCREASE IN DEMAND OF LOANS AND INCASE IN TRUST FOR
LENDERS. MICROFINANCE INDUSTRY WORKS ON CRUDE PRINCIPLE OF
‘CLOSE CONTACT, TRUST AND FINANCING SUSTAINABLE LIVELIHOODS’.
ON ONE HAND IT FUELS MICRO AND SMALL ENTERPRISES; WHILE ON
OTHER HAND GENERATES EMPLOYMENT OPPORTUNITIES IN
UNORGANIZED AND ORGANIZED SECTORS. IT IS ESTIMATED THAT EVEN
DURING PANDEMIC THIS SECTOR EMPLOYS MORE THAN 2 LAKH
INDIVIDUALS WORKING AT FIELD LEVEL, ORGANIZING VIRTUAL MEETING
WITH CLIENTS AND RESOLVING THEIR QUERIES RELATED TO BUSINESS
SUSTAINABILTY, FINANCES, CONVERGENCE OF GOVERNMENT SUPPORT
AND EVEN PERSONAL HEALTH MANAGEMENT RELATED TO COVID-19.
OTHER THAN INTERNAL EMPLOYMENT, THE SECTOR GIVES
EMPLOYMENT AND ENTERPRENEURIAL OPPORTUNITY TO ALMOST ALL
THOSE WHO TAKE LOAN i.e. 3.22 CRORE INDIVIDUALS. IN OTHER WORD
EACH INCOME GENERATING LOAN GIVEN IS FOR CHANGING THE LIFE OF
ALL FAMILY MEMBERS, AN AVERAGE OF FIVE.
COMPLETE LOCKDOWN BROUGHT HALT TO ALMOST EVERY BUSINESS,
BUT WORST AFFECTED WERE THOSE WITH SMALL OR NO RESERVES AND
OPERATE IN HIGH LIQUID MODEL. MOST MICRO AND SMALL
BUSINESSES ARE IMPACT TO EXCEPT THE ONES ENGAGED IN ACTIVITIES
COMING UNDER ESSENTIAL GOODS AND SERVICES AS ANNOUNCED BY
GOVERNMENT FROM TIME TO TIME.
DIMINISHING EARNING CAPACITY OF MFI CLIENTS IS NOW BECOMING
THREAT TO MFI EXISTENCE, ALTHOUGH GOVERNMENT IS TRYING TO
SMOOTH OUT ITS OPERATIONS THROUGH RESCHEDULING OF LOANS
AND MORE GESTATION PERIOD. THE SCENARIO IS BUILDING FOR NEW
MERGERS AND ACQUISITION IN THE SECTOR WITH LOTS OF FINANCIAL
RESTRUCTURING.
AFFECTED CASH FLOWS OF BUSINESS ENTERPRISES IN TURN AFFECTED
THEIR MICROFINANCE SERVICE PROVIDERS AND HENCE THE
COMMERCIAL BANKS AT HIGHER LEVEL. UNEMPLOYMENT IN
UNORGANISED SECTOR SURPASSED ALL LEVELS TILL DATE, AFFECTING
MIGRANTS IN BIG CITIES, ENTERPRISE OWNERS IN CITIES AND TOWNS,
RURAL ENTERPRENEURS AND SEMI/SKILLED LABOUR ALL ACROSS THE
MSME ECOSYSTEM. MICROFINANCE PROVIDERS ARE EXPECTED TO FACE
SERIOUS LIQUIDITY CRUNCH DURING COVID-19, GAP BETWEEN
REVENUE AND OPERATIONAL EXPENDITURES ARE INCREASING WITH
DEPLETING RESERVES. THIS SHRINKING LIQUIDITY MAY NOT CREATE
PROBLEM FOR LARGE MFIs OR THOSE WITH STRONG STABLE BACKUP,
BUT IS SUFFICIENT TO HAUNT SMALL AND MID SIZE MFIs. MFIs WITH
STABLE FINANCING, WELL-ESTABLISHED TECHNOLOGY PLATFORMS AND
STRONG HOLD ON COMMUNITIES HAVE HIGHER PROBABILITY TO
SURVIVE DURING AND AFTER THIS PANDEMIC. CRITICALLY OF
MICROFINANCE OPERATIONS IS NOT LIMITED TO THIS SECTOR ONLY;
SLOWLY IT WILL START EFFECTING LARGE FINANCIERS OF THESE MFIs
INCUDING COMMERCIAL BANKS, DONORS AND INVESTORS.
RESERVE BANK OF INDIA, BEING A REGULATOR OF FINANCIAL SECTOR
ANNOUNCED VARIOUS STEPS TO LIMIT MACRO EFFECT OF PANDEMIC
ON OVERALL FINANCIAL SYSTEM OF COUNTRY, INCLUDING INCREASE OF
MORATORIUM PERIOD FOR LOANS, PART REBATE OF INTEREST RATE,
SPECIAL PACKAGE ETC; BUT MOST OF THESE ANNOUNCEMENTS FROM
RBI ARE FOCUSSED ON COMMERCIAL BANKS AND REMAINED VAGUE
FOR MFIs AND ITS CUSTOMER IN PARTICULAR.
MICROFINANCE INSTITUTIONS WITH THEIR FIELD NETWORK, USE THE
GRAMEEN METHODOLOGY, CB AND RESIDENCE CHECKS, AND
FINANCIAL LITERACY SESSIONS, TO PROVIDE UNSECURED LOANS TO
MEET THE CREDIT NEEDS OF THESE CLIENTS, WITHIN A WEEK OF THE
INITIAL APPLICATION, TO BE PAID BACK WEEKLY/FORTNIGHTLY OR
MONTHLY AS PER THE CLIENT’S PREFERNCE.
VARIOUS STUDIES DONE IN INDIA SHOW THAT WHILE 40% PLUS PEOPLE
FROM THE UNDESERVED STRATA AVAIL LOANS, ONLY 8% SUBSCRIBE TO
RBI REGULATED INSTITUTIONS, THE REST COMING FROM INFORMAL
SOURCES. IN A COUNTRY OF OVER 1.3 BILLION PEOPLE, ONE CAN
IMAGINE THE EXTENT OF FINANCIAL EXCLUSION, ESPECIALLY IN THE
SEMI-URBAN AND RURAL GEOGRAPHIES. ESTIMATES SHOW THAT EVEN
WITH THIS REACH OF CREDIT SUPPLY, JUST ABOUT A THIRD OF THE
MARKET IS BEING SERVED THROUGH FORMAL INSTITUTIONS.
THE MICROFINANCE CLIENT HAS AN ALMOST ZERO GESTATION PERIOD
BUSINESS MODEL AND ONE WHICH COULD GIVE A 10-20% RETURN IN A
SINGLE DAY ALLOWING IT TO BE UP AND RUNNING IMMEDIATELY.
SINCE IT CATERS TO BASIC NECESSITIES, DEMAND IS ALSO NOT AND
ISSUE.
HIGH LEVEL OF CUSTOMER CONNECT, SMALLER TICKET SIZES AND
FREQUENT REPAYMENTS ENSURE HIGH COLLECTION EFFICIENCY. LOANS
COME AT VERY REASONABLE Rs.1000-1200 INTEREST CHARGE FOR AN
Rs.10,000 LOAN FOR 12 MONTHS-THE RATE CHARGED BY PRIVATE
FINANCIERS COULD BE SOMETIMES 12 TIMES THAT AMOUNT. HENCE
THE CUSTOMER WOULD NOT WANT TO SPOIL THE SUSPENSION OF ANY
FUTURE-CREDIT WITH GROUP INDISCIPLINE AND NON-PAYMENT.
THIS SECTOR THAT HAS BEEN BUILT WITH THESE EXTRAORIDNARY
WOMEN CUSTOMERS WHO HAVE, OVER THE LAST 30 YEARS, SURVIVED
MANY CRISES AND BOUNCED BACK THROUGH DROUGHT, FLOOD OR
CYCLONE. THE SPECTACULAR TURNAROUND OF A MICROFINANCE
COMPANY THAT WENT THROUGH A CDR IN THE 2010 AP CRISIS, AND
WENT ON TO DO A SUCCESSFUL IPO LAST YEAR REINFORCES THE BELIEF
THAT BOTH, THE CUSTOMERS AS WELL AS THE COMPANIES/EMPLOYEES
IN THE SECTOR ARE RESILIENT AND NEVER GIVE UP. POST THE AP CRISIS,
THE SECTOR GOT REGULATED BY THE RBI WITH CLEAR MICROFINANCE
GUIDELINES, ESTABLISHED CB DISCIPLINE AND GOT TWO RBI
RECOGNISED SELF-REGULATORY ORGANISATIONS FOLLOWED BY
STRONG INVESTOR INTEREST AND BANK SUPPORT WITH DEBT
FUNDING. POST DEMONETISATION IN 2016, WHERE THE CLIENTS TOOK
TIME TO GET THE OLD NOTES CHANGED TO NEW ONES TO PAY WHILE
ACTIVISTS TWISTED THE RBI FORBEARANCE ON ASSET CLASSIFICATION
TO A LOAN WAIVER, THE INDUSTRY PURSUED ANJD EMBARKED ON A
CASHLESS INITIATIVE-TODAY ALMOST 95% PLUS ON DISBURSEMENTS
AND AN INCREASING 33% ON REPAYMENTS ARE MADE IN A CASHLESS
MANNER, THANKS TO THE PMJDY INITIATIVE. POST DEVASTATING
FLOODS IN TN IN 2017, KERALA IN 2018 AND CYCLONE FANI IN ODISHA
2019 CRIPPLED THE CLIENT’S BUSINESSES, MFIs PLAYED A KEY ROLE IN
EXTENDING CREDIT TO AND NURSING THEM BACK TO HEALTH.
WITH ENTITIES LIKE BANKS AND NON-BANKS NOW ACTIVE IN
MICROFINANCE THE SECTOR, IN A WORLD CLASS INITIATIVE,
ESTABLISHED THE CODE FOR RESPONSIBLE LENDING (CRL) IN
MICROCREDIT IN 2019. VARIOUS OTHER INITIATIVES SUCH AS DAILY
SUBMISSION OF CREDIT DATA TO THE BUREAU, NOT LENDING TO A NPA
CLIENT, LENDING WITHIN AGREED INDEBTEDNESS LIMITS HAVE MADE
THIS A RESPONSIBLE AND RESPONSIVE SECTOR.
EVEN IN THE CURRENT LOCKDOWN, THE COMPANIES AND ITS OVER 2
LAKH EMPLOYEES ARE ACTIVE, CONDUCTING VIRTUAL GROUP
MEETINGS WITH THEIR CLIENTS, HIGHLIGHTING THE NEED FOR SAFETY
AND HYGIENE IN THE COVID-19 CRISIS AND REASSURING THEM ON THE
FINANCIAL FRONT.
CLIENTS HAVE GET BACK TO NORMALCY, REPAYMENTS MIGHT GET
DELAYED AND TENURES OF LOANS MIGHT GET EXTENDED. BUT, THIS,
BUSINESS, UNIQUE IN BEING A DOUBLE BOTTOM LINE OF SOCIAL AND
FINANCIAL OBJECTIVES, IS ABOUT LIVING WITH THEM AND MIRRORING
THEIR CASH FLOWS ESPECIALLY IN SUCH DIFFICULT TIMES.
 BIBLIOGRAPHY

 www.WIKIPEDIA.ORG

 www.INVESTING.COM

 www.BANKBAZAAR.COM

 www.MICROWORLD.ORG

 www.MONEYCONTROL.COM

 www.ECONOMICTIMES.INDIATIMES.COM

 www.BRITANNICA.COM