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MICROFINANCE
T h e o r y and P r a c t i c e
MICROFINANCE
T h e o r y and P r a c t i c e

H.M.W.A. HEARTH
PhD (PGIA), MPhil (Pera), MSc (Norway), BA (Econ Sp) (Pera)

S. Godage & Brothers (Pvt) Ltd.

4 H.M.W.A. HEARTH MICROFINANCE 5

Dedication
First Edition : 2018
MICROFINANCE To my Father
© H.M.W.A. HEARTH and
ISBN 978-955-30-8010-3
Mother

Cover Design by:

S. Godage & Brothers (Pvt) Ltd
Page setting by:
Nisha
Published by:
S. Godage & Brothers (Pvt) Ltd.
661/665/675, P. de S. Kularatne Mawatha, Colombo 10, Sri
Lanka.
Printed by:
Chathura Printers
69, Kumaradasa Place, Wellampitiya, Sri Lanka.
19664/4542/250
6 H.M.W.A. HEARTH MICROFINANCE 7

PREFACE

This book is an outcome of my research and teaching

experience of around one decade of the field of microfinance
and rural banking in Sri Lanka and the knowledge gathered by
attending various local and international seminars, meetings,
conferences, discussions and trainings for many years.
Further, my interest of studying and reviewing of relevant
research studies in the field of microfinance and rural financing
motivated me to disseminate the insight that I have gathered
for interested and needy people.
The key objective of this book is to provide basic and
essential knowledge needed by people who are involved
in various ways in the field of microfinance and those who
working and managing Microfinance Institutions (MFIs),
bankers, university lecturers, students, investors, professional
and development practitioners in this field.
The concept of microfinance is just not only providing
financial facilities, it essentially includes ethical and moral
values and social responsibility to eliminate worldwide poverty
as a noble mission. The original strategy of microfinance was
non-profit oriented and anticipated eliminating poverty. In
the present day more and more financial intermediaries are
entering into the microfinance sector due to globalization,
popularity of the concept and market completition. Some of
the intermediaries enter this market with the motive of profit
8 H.M.W.A. HEARTH
earning for their viability and sustainability, while meeting
their social responsibility and serving the vulnerable women
and poor in the society. The surveys conducted in the field of
microfinance and banking in the past three decades in many
developing countries show that the size of informal financial
markets which is larger than formal markets. Consequently,
the contribution by the informal sector for the fulfilling
of financial requirements of poor has to be recognized as
well. The contribution of MFIs is more important for the
development of this sector, and the channels of microfinance,
approaches of microfinance, fundamentals of microfinance,
modern banking and microfinance systems, micro credit and
microfinance are illustrated in this book.
As a fundamental of microfinance, it has to operate
and ensure viability and sustainability in an increasingly
competitive environment by focusing on the service delivery
with exceptional customer service. The correct market
strategies and the role of microfinance to eliminate poverty
and economic development have to be included in the process.
Chapter two and three has discussed literature on
microfinance activities and operations in various countries
and regions in recent past. Chapter two has illustrated
global microfinance scene and emerging lessons in greater
details. Chapter three mainly has discussed the microfinance
intervention process in Sri Lanka. Most of these currently
available studies both international and local, are basically
limited in analyzing the impact of microfinance intervention on
poverty and empowerment of women clients but not the other
aspects of microfinance such as approaches of microfinance,
institutional strategies and impact of microfinance on poverty,
and socioeconomic and political vulnerability reduction of
low income groups, particularly women.
MICROFINANCE 9
Access to financial services has long been recognized
as an important means of improving income generation
opportunities and overall living conditions among poor
households. As an approach, microfinance appeared as a
strategy to address the institutionalized exclusion of the poor
from formal finan­cial systems. As a tool for poverty reduction
microfinance is based on the premise that improved access to
credit by the poor is cru­cial to improve the returns to economic
activities; it expands self-employment and promotes business
and entrepreneurial activi­ties; it allows incomes to grow and
provides a “safety net” to the poor who are vulnerable to
income fluctuations.
Chapter four of this book is dedicated to the approaches
and models of microfinance in Sri Lanka and the world.
Approaches of microfinance, aspects of outreach, poverty,
microfinance and economic well-being, and women
empowerment and social capital are the main theoretical and
conceptual parts of the chapter.
Over the past three decades, MFIs have adopted
innovative ways of providing services to poor entrepreneurs,
especially in developing countries. Mainly two main
approaches can be identified. In terms of the first approach
that is portrayed as the Minimalist Approach the MFIs
offer only financial services in the form of credit. These
MFIs are unwilling to provide non-financial services due to
multiple reasons ranging from high administrative costs to
high transaction costs. On the other hand, MFIs that follow
Credit-plus Approach provide other services in addition to
financial services. These non-financial services may include
skill development, training, educational activities, marketing
assistance, supply of inputs and business development
services1. According to them, the provision of credit alone
1 Business development services include technical assistance and services
10 H.M.W.A. HEARTH
will not guarantee that the receivers of credit use scarce
capital in productive manner so that the recovery of loans is
not ensured. It is interesting to note that these services are
increasingly being recognized as an important component of
microfinance intermediation as they are associated with the
viability and sustainability of the enterprise. Moreover, it is
believed that the viability and sustainability of enterprises
will in turn ensure financial viability and sustainability of
the relevant MFIs. Even though this is not a direct financial
service, it is part of the financial package offered by a financial
institution and should be kept in mind when outreach of
financial intermediation is studied. Under these broader
two main approaches there are lots of microfinance models
operating in the field. The most popular microfinance models
are Grameen Bank (Bangladesh) model, Self-helf Group
(SHG – India) model, and MFIs model and NGOs.
All over the world microfinance models are replicated
by one another in search of best practices and working
models. In the process of replication the authorities should
deeply understand ‘what microfinance strategy is’, and the
lending models of MFIs vary substantially depending on the
characteristics of target groups, environment of the country,
local rules and regulations and organizational philosophies.
Once the products (credit, savings, insurance,
remittances, leasing, housing and pawning) and services are
provided to the poor it is important to assess the socioeconomic
impact and further improve the system. The impact assessment
of post evaluation can identify the factors affecting creating
poverty and vulnerability, and such factors would help in
formulating strategies, which can address poverty reduction.
The widely used impact assessment methods are randomized
such as training on business and financial management, accounts/book
keeping.
MICROFINANCE 11
pre-test post-test evaluation method, quasi-experimental
design method, ex-post comparison of project and non-
equivalent control group method, and rapid assessment ex-
post impact evaluations method. The main issue with these
impact evaluation methods is the operation cost, time and man
power. Some impacts which can be identified are increase
of households income, accumulated assets, number who
crossed the poverty line, reduced socioeconomic vulnerability,
empowerment of women, reduced isolation, find basic needs,
and savings provided for the safety of the poor, etc.
Understanding the operational process and impacts of
MFIs and their impacts on living standards of households is
essential for the analysis of issues that affect the demand for
and supply of microfinance. Therefore, Chapter five and six
of this book attempts to evaluate the nature and patterns of
activities, current status, and services provided by SEEDS and
TCCSs in the Kandy District with reference to minimalist and
credit-plus approaches. The analysis of the current status as
presented here is a subjective one, based on the perceptions of
the MFIs interviewed and the secondary data gathered from
relevant institutions. The demand side analysis, Chapter six
discusses impacts of microfinance on household income and
overall living conditions. Further, it analyzes the extent to
which households have utilized financial services, and explore
the disparities between TCCSs and SEEDS, gender and
income groups with special attention on minimalist and credit-
plus approaches. The family/household is considered as the
center of this analysis. The reason is that small enterprises in
rural economies are closely linked with the family/household.
Chapter seven of this study dedicated to describe
the impact of microfinance on women empowerment. The
findings of the survey conducted on “Impact of Microfinance
on Poverty and Vulnerability: Case with Two Microfinance
12 H.M.W.A. HEARTH
Institutions in Kandy District, Sri Lanka” by myself in
2013 was based to explain the impact of microfinance on
women empowerment. There are five main sections in the
chapter namely, brief introduction to women empowerment,
quantitative analysis of women empowerment, the Women
Empowerment Index (WEI), regression analysis on
women empowerment, and qualitative analysis on women
empowerment. Regression models, qualitative measures and
a women empowerment index were utilized for the analysis
of women empowerment ability of microfinance.
‘Empowerment’ basically means a process through
which people acquire more influence over factors that shape
their lives. Microfinance is regarded as one such policy
tool that seeks to empower women and reduce income and
consumption poverty, and socio-economic vulnerability. The
concerns for gender equity and women’s rights are at the
present an integral part of pro-poor development planning.
The “gender and poverty” debate has focused on a number of
issues, within which women are seen to be disproportionately
poor because they lack access to resources and control over
resource. Gender inequalities are particu­larly visible in
resource-based entitlements (land titles, property rights, credit,
etc). Hence, the rationale that access to credit will gen­erate
income and livelihood options with more opportunities gives
women more bargaining power within the household and
contributes to family wellbeing.
Dr. H. M. W. A. Herath
Senior Lecturer, Economics
Department of Economics and Statistics
University of Peradeniya
Sri Lanka
ariyarathneherath@gmail.com
MICROFINANCE 13
ACKNOWLEDGEMENTS
I wish to offer my sincere thanks to Senior Professor
Danny Atapattu, University of Ruhuna, Dr. Nimal Sanderatne,
Visiting fellow PGIA, University of Peradeniay, Professor
L.H.P.Guneratne, University of Peadeniya, Professor, Sisira
Pinnawala, University of Peradeniya, and Senior Professor,
Anoma Abhayaratne, University of Peradeniya suggested
me to write a book based on my PhD thesis and research and
teaching experience in the field of microfinance and rural
finance.
In every success of my life my family has been standing
behind me. Of them all, my late mother and father, who were
always dreaming about my triumph, are particularly special.
Though you could not be here to see the day your greatest
dream came true, I know you are both watching from above
and share my success with me. I must mention my daughters
Vidu, Premeshi and Nethmi, whether they understand it or
not, they will be the happiest persons in the world one day
with my achievements. Last but not least, I must thank my
wife, Rupika, who was a tower of strength for me throughout
this work.
14 H.M.W.A. HEARTH MICROFINANCE 15

ABBREVIATIONS
ADB Asian Development Bank
AIMS Assessing the Impact of Microenterprise
Services
AusAID Australian Agency for International
Development
AWRD Average Weighted Deposited Rate
BoC Bank of Ceylon
BKK Sub District Credit Institution in Indonesia
BRAC Bangladesh Rural Advancement Committee
CAPS Co-operative Agriculture Production and
Sales Societies
CBO Community Based Organization
CBSL Central Bank of Sri Lanka
CGAP Consultative Group to Assist the Poorest
CIDA Canadian International Development Agency
CP Credit-Plus
CRB Co-operative Rural Bank
DFCC Development Finance Corporation of Ceylon
DFID United Kingdom Department for International
Development
GB Grameen Bank in Bangladesh
GCE (O/L) General Certificate of Education (Ordinary Level)
GCE (A/L) General Certificate of Education (Advance Level)
GDP Gross Domestic Product
GoSL Government of Sri Lanka
GTZ Deutsche Gesellschaft fur Technische
GTZ/RBIP Zusammenarbeit (German Technical Co-operation)
Rural Banking Innovation Project
HHs Households
HNB Hatton National Bank
ICRTL International Centre for Training of Rural Leaders
IFAD International Fund for Agricultural
Development
IMF International Monitory Fund
16 H.M.W.A. HEARTH MICROFINANCE 17
INGO International Non-government Organization
LDCs Less Developed Countries
CONTENTS
M Minimalist Approach
MF Micro Finance Preface
MFIs Microfinance Institutions Acknowledgements
MPCS Multi-purpose Co-operative Societies Abbreviations
NCRCS New Comprehensive Rural Credit Scheme
NDB National Development Bank Chapter 1: Microfinance
NDTF National Development Trust Fund 1.1 Background
1.2 Microfinance and Banking
NGO Non-governmental Organization
1.3 Modern Banking System and Microfinance
NSB National Savings Bank 1.4 Microfinance and Micro Credit
PAMP Poverty Alleviation Microfinance Project 1.5 Fundamentals of Microfinance
PRADAN Professional Agency for Development Action 1.6 Average size of Micro Credit
RDTI Rural Development Training Institute 1.7 Microfinance and Small and Medium Enterprise Loans
REAP Rural Economic Advancement Project 1.8 Channels of Microfinance
ROSCA Rotating Savings and Credit Association
RDB Regional Development Bank Chapter 2: Global Microfinance Scene and Emerging Lessons
SBD Samurdhi Development Banks 2.1 Access to Microfinance and the Poor
SBS Samurdhi Banking Societies 2.2 Commercialization Approach Verses Social Fund Approach
SDB SANASA Development Bank 2.3 Some of the Practicalities of Poverty Targeting
SEEDS Sarvodaya Economic Enterprise Development 2.4 Impact of Poverty and Vulnerability
2.5 Microfinance and Women Empowerment
Services
2.6 Criticisms of Women Empowerment through Microfinance
SEEP The Small Enterprise Education and
Promotion Chapter 3: Microfinance Intervention Process in Sri Lanka
SHG Self-Help Group 3.1 Historical Overview
SLCDF Sri Lanka Community Development Fund 3.2 The Microfinance Landscape in Sri Lanka
SLIS Sri Lanka Integrated Survey 3.3 Microfinance in Informal Sector
SLR Sri Lanka Rupees 3.4 Studies on Microfinance in Sri Lanka
SMF Social Mobilization Foundation
TCCSs Thrift and Credit Co-operative Societies Chapter 4: Theory and Concepts in Microfinance
UNDP United Nations Development Program 4.1 Approaches of Microfinance
UNHCR United Nations High Commissioner for Refugees 4.2 Aspects of Outreach
UNICEF United Nations Children’s Fund 4.2.1 Depth of Outreach
4.2.2 Worth to Users and Cost Users
USAID United States Agency for International
4.2.3 Breadth, Length and Scope of Outreach
Development 4.3 Poverty, Microfinance and Economic Well-being
WB World Bank 4.3.1 Defining and Measuring Poverty and Vulnerability
18 H.M.W.A. HEARTH MICROFINANCE 19
4.3.2 Income Poverty and Deprivation
4.4 Women Empowerment and Social Capital
4.4.1 Social Capital and Its Economic Perspective
4.4.2 Women’s Empowerment

Chapter 5: Microfinance Intermediation Process of TCCSs and SEEDS

5.1 Background of TCCSs and SEEDS in Kandy
5.2 Access to Finance and Financial Inclusion CHAPTER ONE
5.3 Recovery Status Microfinance
5.4 Collateral Requirement
5.5 Credit - plus Services
5.6 Interest Rates
5.7 Services on Women Empowerment 1.1 Background
5.8 Project Monitoring
5.9 Constraints and Limitations Microfinance can be defined as the provision of a
5.10 Summary broad range of financial services such as deposits, credits,
payment services to the poor and low income households
Chapter 6: Impact of Microfinance on Households: TCCSs and SEEDS
6.1 Outreach of Microfinance and their microenterprises (ADB, 2000). The discourse on
6.2 Accessibility of MFIs microfinance traverses several fields and interconnects with
6.3 Purpose of Borrowing issues of economic globalization and neoliberal policies,
6.4 Terms and Conditions on Loans strate­gies for poverty and vulnerability reduction, and path­
6.5 Interest Rates ways for women’s empowerment. Its credibility has grown
6.6 Credit-plus Services
over the last few decades, including international legitimation
6.7 Barriers to Access
6.8 Satisfaction on Accessibility and Services of MFIs of it as a tool for addressing poverty and socio-economic
6.9 Empowerment of Women vulnerability. The Microcredit Summit held in Washington
6.10 Impact of Financial Services DC in 1997, recognized it as a “miracle tool” for poverty
6.11 Expectations and Suggestions for Improvement reduction. It focused on four themes – reaching the poorest,
6.12 Summary the empowerment of women, building self-sufficient financial
institutions and ensuring a positive and measurable impact
Chapter 7: Microfinance and Women Empowerment
7.1 Introduction to Women Empowerment on the lives of clients and their families.
7.2 Quantitative Analysis of Women Empowerment A vast empirical and theoretical literature on poverty
7.3 The Women Empowerment Index (WEI) reduction and microfinance exists as microfinance is
7.4 Regression Analysis on Women Empowerment
considered to be an entry point in a wider strategy for enlarging
7.5 Qualitative Analysis on Women Empowerment
poor’s lively-hood options. However, the existing evidence
Bibliography on the impact of microfinance on poverty and vulnerability
20 H.M.W.A. HEARTH
reduction of poor is ambiguous. While some research work
suggests that access to microfinance has the potential to reduce
poverty significantly (Hashemi et al., 1996; Montgomery et
al., 1996; Remenyi, 1997; Khandker, 1998; Husain, 1998;
Khandker and Pitt, 2005; Swain et al., 2008), others argue
that microfinance has a minimal impact on poverty reduction
(Morduch, 1998; Altay, 2007; Banerjee et al., 2009; Roodman
and Morduch, 2009). Comparative study of Vanuatu and El
Salvador, Daley-Harris and Zimmerman (2009) showed that
when microfinance is used to meet day-to-day consumption
it can lead to debt for the borrowers.
According to The State of the Microcredit Summit
Campaign Report (2006), microfinance services can be
categorized as follows;
Micro-credit: especially a reliable source of working
capital, dispersed against ‘collateral substitutes’ such as
standing in the community, group guarantees or compulsory
savings.
Deposit services: designed to offer poor households
alternative savings options to the hoarding of cash or other
stores of value.
Insurance products: including insurance against loan
default due to misadventure, illness, death, natural disasters
or unanticipated economic crisis, plus anticipated life-cycle-
related savings goals to prepare for weddings, funerals or
other socio-economic obligations.
Financial advisory services: whereby the views and
needs of the poor are given a voice and brought to the attention
of policy makers, regulators and those with the authority to
influence the environment in which poor households and
informal sector institutions have to operate.
MICROFINANCE 21
MFIs be they a bank, a cooperative, a credit union, and
NGO or some other form of non-bank financial intermediary,
seek to provide clients or low income households with a range
of money management and banking services. Microfinance
appeared as a strategy to address the institutionalized
exclusion of the poor, especially women, from formal finan­cial
systems. Microfinance as a tool for poverty and vulnerability
reduction is based on the premise that improved access to
credit by the poor is cru­cial to improve the returns to economic
activities; it expands self-employment and promotes business
and entrepreneurial activi­ties; it allows incomes to grow and
provides a “safety net” to the poor who are vulnerable to
income fluctuations.
Innovative financial services such as especially
credit and savings are expected to break the vicious cycle
of poverty. According to Yunus (1994) a virtuous circle
can be established: “low income, credit, investment, more
income, more credit, more investment, and more income”
(International Development Support Services, 1994, p.6).
Most governments in LDCs have tried to improve their finance
management because they believe that economic development
is inhibited due to people in rural sector being too poor, lack
of capital and high interest rates when they borrow from the
informal money market. Commercial Banks are generally
urban biased. They serve mainly urban/sub urban elite groups
(in relative sense). And also commercial banks probably target
the business sector. As microfinance has become recognized
as a valuable tool for increasing the livelihoods and reducing
vulnerability, many World Bank project planners have become
eager to include microfinance components in social funds
and other multisectoral projects (Alexandra and Silva, 2002).
One of the recent studies has revealed that Sri Lankan
financial market is essentially a microfinance market with
22 H.M.W.A. HEARTH
over 80 percent of households having total borrowings
below Rs. 100,0001. With the objective of fulfilling these
small credit requirements various approaches and programs
have been advocated on the role of microfinance in poverty
and vulnerability reduction. All these programs are aimed
at providing access to credit for poor people at affordable
interest rates. In addition to the government, a wide range
of semiformal institutions, private institutions such as
non-governmental organizations (NGOs) and some social
institutions are also working in the sector. However, the
achievements have been inadequate, especially in terms of
reaching the small entrepreneurs. The main reason is that these
programs include terms and conditions that are not favourable
to the rural poor. Among these conditions are the collateral
requirements from the institutions that made the loan beyond
the reach of the poor (Colombage, 2004; Ministry of Finance
and Planning- Sri Lanka and GTZ, 2008). Other problems
associated with the programs are lack of program planning,
clear-cut policy directives, small loan amount, inappropriate
training and coordination among banks and line agencies.
Having being driven from the formal credit markets due
to these stringent conditions, poor entrepreneurs resort to
borrowing from informal sources. This may affect the rating
of formal sector financial services for micro-entrepreneurs.
This study describes recent developments of microfinance
intervention process at the global level in general and Sri
Lanka, in particular. It also examines how and to what extent
microfinance intervention can contribute to improvement of
households’ income generation opportunities, overall living
conditions and reduce poverty and vulnerability. To study the
different approaches of microfinance intervention and their
1 Ministry of Finance and Planning and GTZ. (2008). Outreach of Financial
Services in Sri Lanka, A Look at Demand-side from a Microfinance
Perspective. Sri Lanka – German Development Cooperation, Colombo.
MICROFINANCE 23
impact on living standards of households as a whole and
women’s socio-economic development, the study undertook
an indepth analysis of processes and practices of two leading
MFIs - SANASA (TCCSs) and Sarvodaya (SEEDS) operating
in Kandy District, Sri Lanka. The analysis of the current
status of TCCSs and SEEDS is a subjective one, based on the
perceptions of the institutional officials interviewed and the
secondary data from relevant institutions. As an exceptional
case study, the final three chapters of the book, explores the
impact microfinance on households and particularly women’s’
socioeconomic empowerment with reference to TCCSs and
SEEDS operating in Kandy District.
1.2 Microfinance and Banking
As mentioned earlier, the concept of microfinance itself
has a wider meaning than just providing services to clients
loans, savings facilities, insurance, guarantees, remittances,
as well as non financial services and products targeted at low
income customers. Microfinance essentially includes ethical
and moral values and social responsibility to eradicate global
poverty as a noble mission. The concept of microfinance is
not new and has existed for centuries in the world.
Most of the microfinance practices were based on mutual
trust and transactions were carried out by numerous traditional
and informal systems that have existed in developing countries
for centuries. Most of the credit transactions were granted
without personal of other kind of collateral. The rotating
associations (Cheettu system in Sri Lanka) and money lenders
are good examples. They were more efficient than any of the
financial institutions in the world without transaction cost
and were able to recover 100 per cent debt on time. Far back
in 1720 in Bolivia, Bancosol provided microfinance to the
poor people. In 1895, Java, Indonesia, operated microfinance
24 H.M.W.A. HEARTH
activities through the Priyayi Bank. The informal credit
activities “Susus”in Ghana, “Chit Fund”in India, “Trantriers”
in Mexico and numerous saving clubs and burial societies
operated all over the world.
1.3 Modern Banking System and Microfinance
The evolution of modern banking system created
an environment for change and integration of traditional
microfinance system into new models of microfinance. The
new concepts of microfinance models were of comparatively
recent origin and only four decades old. These microfinance
models used, various group systems, Credit Associations,
Grameen Banks, community banks, International Non-
Governmental Organizations (NGOs) and commercial banks
and specialized banks deliver financial services under the
microfinance label.
The former U.N. Secretary General Kofi Annon,
having identified the important role of microfinance in the
war against poverty and hunger states, “Microfinance has
provided its value in many countries as a weapon against
poverty and hunger. It really can change people’s lives for
better, especially the lives of those who need it most”.
The founder of the Grameen Bank, Bangladesh (the
world largest microfinance bank network) and the Nobel Prize
laureate, Professor Mohammad Yunus defines, “microfinance
is supposed to describe loan offered with no collateral to
support income generating business aimed at lifting poor out
of poverty”. Further he emphasized, “Poverty is not created
by the poor, it is created by the structures of the society, and
the policies pursued by the society”. Change the structure
as we are doing in Bangladesh, and you will see that the
poor change their own lives. The Grameen Bank experience
demonstrates that, given the support of financial capital,
MICROFINANCE 25
however, small, the poor are fully capable of improving their
lives”. The World Bank’s definition states “microfinance
comprises of small savings, savings based credit, (group loans
mostly for consumption) bank credit for income generating
activities, payment services, money transfers, insurance,
linkages between credits and integrated with non credit inputs,
such as capacity building, backward and forward linkages for
sustainable development through microfinance at household
level in poverty sector”.
In all these definitions, the core focus is to use
microfinance to eradicate poverty and increase the standard of
living of the poor, especially the Vulnerable women. Poverty
means powerlessness, hunger, not having income generating
opportunities, jobs, lack of shelter, clothes, not being able to
obtain medical care, no access to school, unable to read or
write, fear for future, hand to mouth existence, losing children
due to sickness, lack of pure drinking water, food, electricity,
and sanitation etc.
In essence, microfinance is an amazing simple
practically proved banking tool to eradicate disparities and
poverty by providing loans and other services to extremely
poor people, especially for women, who are vulnerable in
socially, politically and economically and living at the bottom
of population pyramid, to help them to rise from poverty
through entrepreneurship.
1.4 Microfinance and Micro Credit
Microfinance is a wide range of financial services to
low income micro level enterprises in the household sector.
It includes small savings, small short term loans, micro
insurance, remittances and money transfer, guarantees and
broad range of financial services, as well as non financial
services such as provision of business development and
26 H.M.W.A. HEARTH
capacity buildings. Empowerment of women needs,
education, income generation opportunities, and health
services are targeted for low income clients. In microfinance
it is important to highlight the significant influence of the
savings and financial products, other than the loans for poor
people. It is difficult for poor people to borrow money without
first building up the capacity to save and discipline money
management. The well to do clients (rich), as well as the poor
clients need diversified financial services to develop their
enterprises. Microfinance is useful for the smallest business;
usually the income generating activity for a family.
Micro credit, more narrowly explained, is a credit
service to low income customers; usually small loans for
micro enterprises and income generating activities. Most
of the micro credit schemes involve compulsory savings
which they use as collateral for the loans granted. These
savings will become a capital of micro credit institutions.
Both microfinance and micro credit use group based delivery
systems for savings and credit to reduce the cost of service
delivery.
1.5 Fundamentals of Microfinance
Microfinance operators have to ensure their sustainability
and profitability in an increasingly competitive environment
by focusing on the services delivery with exceptional
customer services. The key success factors of microfinance
are correct market strategies, main operating principles and
the microfinance rate of poverty reduction and management
of economic development.
The universal declaration of Human Rights was adopted
on December 10, 1948 by the General Assembly of the United
Nation, and Article 25 (1) of that declaration, states everyone
has the right to a standard of living for the health and well-
MICROFINANCE 27
being of himself and his family, including food, clothing,
housing and medical care, and necessary social services,
and right to security in the vent of unemployment, sickness
disability, widowhood, old age or other lack of livelihood in
circumstances beyond his control”.
If society is unable to ensure these human rights, poverty
cannot be eradicated within the members. The myth, they
argue, is that since the poor cannot provide collateral, there
is no way to lend to the poor. The banks believe rich people
only can provide collateral and banks lend money, thus making
rich richer and poor poorer and creating inequality in the
economic, social and political systems.
The poor are bankable as well as the rich people, the
poor people always borrowed money from the informal sector
and repay most of these loans at a high rate of interest. If the
microfinance institutions (MFI’s) can effectively monitor
micro credit, the loans given to the poor can be recovered
easily. Credit is a powerful weapon to create economic
and social development in the society. The more credit one
can receive the more resources he can command and credit
received by poor will empower their income generating
activities.
The people who live under poverty have sub segments,
such as poorest of the poor, poor, and poor entrepreneurial.
Most of the microfinance providers concentrate on providing
facilities, saving, and credit to the less poor, laboring poor
and poor entrepreneurial. The poorest of the poor has to be
provided with subsidies, advisory services, skill development
etc. thses non financial service are called credit plus services.
Another important consideration of microfinance is the
realistic rate of interest. There are three elements to decide
the interest rate:
28 H.M.W.A. HEARTH
1. Cost of funds (the rate paid to depositors, rate paid to
borrowed money, cost of dividends etc.)
2. Cost of loan defaults
3. Administrative cost (credit delivering and recovering,
collecting savings, collecting insurance premium etc.)
The microfinance interest rates on lending are higher
than commercial banks lending rates, but much lower than
interest rate prevailing in the informal money market.
Fundamentally, savings mobilization will strengthen
the sustainability of the MFI’s. savings will increase the fund
base and institutions can extend facilities to more clients.
In addition, MFIs provide opportunities to invest in outside
institutions (banks) and earn more profits. The increase of
savings creates more liquidity for the MFIs.
The keeping basic accounts and recording financial
transactions for the purpose of income statement and balance
sheet is another important fundamental for managing MFI
effectively. Keeping proper accounts enhance MFIs position
to face the issue of good governance, display greater
transparency and accountability and control the MFIs
activities.
Identification of target markets for MFIs and
development of market strategy is an important fundamental
for MFIs. Each MFI should be oriented to the needs of the
particular community and find innovative methodologies to
increase outreach.
Like any other financial product, microfinance also has
its risks and challenges as follows;
 Credit risk
 Interest rate risk
MICROFINANCE 29
 Market risk
 Loan settlement risk
 Liquidity risk
 Operational risk
Credit risk is mainly due to wrong identification of
clients or groups. Immature groups or less motivated groups
or clients may default repayment of loans.
Micro credit involves high administrative costs
associated with small loans; they either need to be heavily
subsidized or charge relatively high interest rates to cover
overhead and transaction costs. This cost has to be accurately
calculated. When large members of small loans are given to
the poor, spread in large geographical area, borrowers are
more likely to default, and allocation of loan installments is
made more labour intensive. Due to these facts, comparatively,
MFIs have to set the correct, appropriate rate of interest to
avoid interest rate risk.
Market risk may develop due to competition of MFLs
and other financial intermediaries in the area of operation.
Profitable MFIs have to increase their deposit mobilization by
increasing clientele. To attract more clients, if you increase
the deposit rates or decrease credit interest rates, institutions’
profitability will reduce unless if you keep at the correct
economic scale. This risk has to be carefully monitored.
Loan settlement risk may occur due to so many reasons,
such as misuse of the loan obtained, collapse of the business
due to external factors, disaster faced by the household, death,
sickness etc.
Liquidity risk of a MFI is the insufficient cash flow for
the day to day operation. If a customer wanted to withdraw
some amount of deposit, MFI should be able to accommodate
30 H.M.W.A. HEARTH
the request. If it fails the trust of the clients will fade, resulting
in the risk of more outflows of deposit and loss of customers.
Operational risk is mainly due to the inefficient
management of operational expense passed over to clients
as increased interest rates. If managers are well trained
and motivated and appropriate new technology is used, the
operational cost can be reduced and the risk avoided. The
managers need to be careful to ensure the borrower’s success,
providing good customer service and inform clients about
the risk involved, to influence the borrower’s response to the
loan repayment. Operation risks would also increase due to
wrong procedures of delivering credit, lack of administrative
information, internal and external fraud, weaknesses of
administrative structure, environment risk, legal problems
(registration, taxes etc.), weaknesses of monitoring of credit
and political influences.
As a principle, the poor entrepreneurs are the future
successful businessmen. The world’s most rich people started
their business in very small ways and reached the top by
working hard. The poor people have the same will and skill
as big business operators. Poor are also aware of the risk and
the repayment of debts, as scheduled to maintain access to
borrow money in the future.
Fundamentally, poor people need verities of financial
services, not just credit, and they need savings, insurance,
money transfers and many other financial services in the
present society. On the other hand, as a principle, MFIs are
also in need of a large amount of money to rapidly expand
their operational capacity to reach economies for scale, and
without increasing operational capacity, MFIs are unable to
provide more and more services to poor. The possible ways of
finding funds are by accessing donor’s funds, grants, obtaining
financial facilities from formal financial market (loans) and
MICROFINANCE 31
increasing deposit mobilization. They can recycle the loans
and provide more financial products and increase profitability.
As a matter of fact, in most of the developing countries, formal
financial systems look after the well to do clients. Poor don’t
have access to formal system due to the lack of collaterals.
Only MFI or the informal system serves the poor. Therefore,
it is very important for poor households to obtain micro credit
to imprive their living standard, increase assets, find self
employment and resist sickness and natural calamities etc.
It is observed that for the poor, micro credit is not the
only answer to eradicate poverty. They need other kinds
of support, such as a package of social welfare services,
including family planning, health services, housing, drinking
water, nutrition, child development programs, and education
on business planning etc. considering the MFIs operating
environment suitable programs have to be offered to the poor
societies.
In most of the developing countries, governments have
the major role in providing micro credit. It has been proved
that governments never achieve satisfactory success; never
do a good job on lending programs, due to politics. The best
option is for governments to create an environment to support
and implement the correct policies to increase the capacity
of MFIs.
It is fundamentally important that the governments
should introduce and implement specific regulatory
framework suitable to the country and to the society. The
goal is to reduce different practices, unsuitable operations
and fragmentation of the microfinance sector and create a
set of rules and regulations and support to build sustainable
MFIs in the country.
The expansion and effectiveness of microfinance needs
a number of other pre-requisites and credit alone will not
32 H.M.W.A. HEARTH
achieve the desired objectives. MFIs need outside funding
for expansion with a tolerable grace period. Further, countries
should implement macroeconomic policies that are conducive
to microfinance, such as implementation of programs to
improve economic and social infrastructure such as health
and sanitary facilities, education, training, road development,
marketing, skill development and capacity development etc.
1.6 Size of Micro Credit
In Sri Lanka there is no nationally accepted policy for
microfinance loan amount to be granted. In practice, most of
the loans are short term; small loans are granted against the
group savings.
According to the GTZ survey, an average loan is less
than Rs. 100,000, and over 80 per cent households have
borrowings not exceeding Rs. 100,000. In the estate sector,
over 87 per cent of households have borrowings below Rs.
50,000. In the Western province, the average loan size is Rs.
162,000 and North Central province is around Rs. 27,0002.
There are differences in average loan size in provincial, estate,
urban and rural sectors. in India, the average loan size is Indian
Rs. 25,000 and it increase to Indian Rs. 40,000 after successful
track record of two to three years3. In Bangladesh, the average
loan size is Bangladesh Taka, 26,336. The average loan size of
micro credit is different from country to country and generally
in developing countries it is less than US $ 100 (Rs. 11,400).
1.7. Microfinance and Small and Medium Enterprise
(SME) Loans
As mentioned previously, microfinance is mainly
focused on poverty reduction, rural employment creation,
income generation, and empowerment of women in society
2 Microfinance Industry Report – Sri Lanka GTZ (2009).
3 Report on Micro Credit, Reserve Bank of India (2009)
MICROFINANCE 33
in a sustainable basis. In this sector hardly any collateral
available, but they can use their creative skills and abilities
links for compulsory small savings. The borrower’s enterprises
are mainly on household’s basis. Most of the poor borrower’s
income is less than US $ 2.00 per day (Rs. 310). In an in-depth
analysis the poor people can be categorize into three groups:
 Poorest of the poor
 Laboring poor
 Poor entrepreneurial
In some countries such as Bangladesh they have
microfinance programs even for the beggars. But most viable
categories for microfinance are the poor entrepreneurial and
the laboring poor can also be helped to a certain extent.
In Sri Lanka there is no nationally accepted definition for
small and medium enterprises (SME). SME have been defined
in terms of values of fixed assets, the size of employment or
a combination of the two. The Industrial Development Board
of Sri Lanka defines its target beneficiaries as those with a
capital investment of less than Rs. 4 million. The Department
of Small Industries defines SMEs as those with a capital
investment of less than Rs. 20 million (excluding lands and
buildings)4 per project. Global experience reveals the use of
three main criteria to define SME.
Number of full time employees
Turn-over or production
Total assets value
A common definition of SME includes registered
business with less than 250 employees. SMEs are separated
from microfinance as having a minimum number of employees
4 National Strategy for small and medium enterprises sector development
in Sri Lanka, White Paper by Task Force Reports (2002).
34 H.M.W.A. HEARTH
such as 5 or 10. The SMEs are very strong in providing
employment, as they need more labour. Most of the SMEs
are labour intensive enterprises. SME has been recognized
as an important strategic sector for generating a high level
economic growth, reducing unemployment inequality and
poverty. The SME sector contributes significantly to increase
the gross domestic product of most countries. This sector
is mainly financed by the banking institution, supported by
governments and international agencies. Therefore it can be
revealed that according to definitions and characteristics there
are vast differences between microfinance and SMEs.
1.8 Channels of Microfinance
Due to distortion and repression of its financial markets,
most of the developing countries blindly following western
type of banking systems have created an idea that microfinance
is not profitable. Due to this situation, small poor borrowers
do not have access to traditional banking services. Therefore,
in the absence of formal financial institutions, low income
people turn to informal sources of finance for monetary needs.
The channels of microfinance can be broadly divided
into three categories:
 Formal channels
 Semi formal channels and
 Informal channels
Formal channels are characterized by high level
of regulations and supervision. Institutions operating in
this channel are, Government Ministries, Central Bank,
Government Departments, Commercial Banks, Development
Banks, Rural Banks, Postal Departments, Savings Banks,
Finance companies, Insurance companies, Pension and
provident funds etc. The semi formal channels may not be
MICROFINANCE 35
formally regulated but are often supervised or monitored
by some government authorities. This category includes
co-operative societies, co-operative unions, village banks,
registered self help groups, registered NGOs, registered MFIs,
pawn brokers, registered welfare societies, registered women
societies etc.
The informal channels characterized and demonstrate
high market potential and they prove that profit can be made
in the microfinance market. They are competitive and give
loans without collaterals and 100 per cent loans are recovered.
This sector is not regulated by any agency of registered
with any institutions. They are professional money lenders,
landlords, traders, relatives and friends, rotating credit and
savings societies etc. In the recent past, Latin America, Africa
and some South East Asian countries have developed new
channels for microfinance such as banking agents system,
prepaid debit cards, cell phone banking etc.
Further, loan process can be reduced by using new
technology, and the following microfinance channels are
developing all over the world: mobile banking, cell phone
banking, e-mail banking, short message service (SMS); Global
positioning system (GPS), web base financial services, ATM
debit and credit cards, solar or wind energy, on line market
plans, branchless banking, electronic banking and digital
banking etc.
36 H.M.W.A. HEARTH MICROFINANCE 37
shown in table 2.1, in terms of microfinance coverage of
poor families, Sri Lanka covers 63 percent of families, which
is the highest in South Asia. Meanwhile, in Bangladesh it
was 62 percent in 2008 (Sophastiernphong and Kulathunga,
2009). This means that reaching to poor by existing formal
and semi-formal microfinance intermediaries in Bangladesh
CHAPTER TWO and Sri Lanka is in a satisfactory level.
Global Microfinance Scene and
Table 2.1: Extent of Microfinance Outreach in South Asia
Emerging Lessons
Country Population Poverty Poor MF MF
(million) Ratio Families Clients coverage of
% (million) (million) poor
2.1 Access to Microfinance and the Poor families %

Access to microfinance and financial inclusion is very Afghanistan 22 55 2 0.12 3

close and interrelated scenarios. Access to microfinance means Bangladesh 143 50 13 16 62
providing an environment in which people in general have
India 1100 30 60 15 9
access to formal micro financial service and, through that to
the use of different financial products at affordable prices. Nepal 26 35 1.6 0.5 14
Micro financial inclusion means the process of facilitating Pakistan 155 33 8.5 0.58 2
those sectors and segments of the population that are outside, Sri Lanka 20 25 1 2.5 63
to become a part of the formal micro financial system and
Note: Poverty Ratio in Sri Lanka in 2009/2010 is 9 per cent and in Kandy District 10 percent.
enrolling individuals or groups into the formal micro financial Source: Sophastiernphong and Kulathunga (2009)
sector (Jayamaha, 2008). MFIs are classified as formal, semi-
formal and informal (Sanderatne, 2002).1 According to the vast amount of literature, some of
To fight against poverty, microfinance is vital just as the key characteristics of microfinance are easy access to
education, health, human rights, and good governance. The low income groups, individual and group-based lending,
United Nations has declared 2005 as the international year of less or no collateral requirements and reasonable interest
microcredit, which recognized microfinance as an important rates. Remenyi (1997) pointed out that MFIs succeed where
way to meet the millennium development goals, particularly modern banks have failed because they have learned five key
the goal of halving the world’s poverty rate by 2015. As lessons: (i) how to accommodate collateral substitutes as an
1 In Sri Lanka, formal institutions include commercial banks – both effective basis for client selection. (ii) how to use self-interest
state owned and private banks and development banks. Semi-formal
to manage risk and maintain high on-time recovering rates.
institutions include various NGOs and cooperative societies. Informal
sources include professional money lenders, shop keepers, traders, and (iii) how to minimize the cash cost of making small loans and
Rotating Savings and Credit Associations (ROSCAS). collecting small savings. (iv) how to mobilize peer pressure
38 H.M.W.A. HEARTH MICROFINANCE 39
and social background to enforce contractual obligations benefit from it. According to their calculations, it is estimated
and (v) how to segment the market so as to remain focused that only one out of every eight people who could benefit
on the poor, yet target the well-motivated. On the basis of from microcredit currently has access to it. However, there
these lessons and practices, MFIs decided to understand that is no accurate estimate of the number of MFIs that currently
banking with the poor can be cost-effective, but only if costs exists in developing countries. Yet, there is a core of less than
are contained, risks are managed and clients treated as active 100 major MFI entities in Asia, Africa and Latin America that
partners in the conduct of the business of the enterprise. dominate the microfinance scene. By 2006, there were 3,316
However, some reports cited the fact that commercial lenders MFIs
exists inwith more
developing than 133
countries. million
Yet, there members
is a core of less than worldwide. Of in Asia,
100 major MFI entities
in rural areas prefer to deal mainly with large scale farmers2. these,
Africa and69.8 percent
Latin Americawere amongthethe
that dominate poor (defined
microfinance scene. Byas2006,
earning
there were 3,316
Churchill (1997) pointed out that micro loans have not less
MFIs than US$
with more than1133
a million
day). members
Womenworldwide.
accounted for69.8
Of these, 85percent
percentwere among the
attracted commercial banks because of the high risks and of poor clients. In Sub-Saharan Africa, a total of 970 MFIs
poor (defined as earning less than US$ 1 a day). Women accounted for 85 percent of poor
low return banks associate with micro operations, namely: clients. In Sub-Saharan
reported having 8.4 Africa, a total clients
million of 970 MFIs reported2008).
(Degol, having 8.4 million clients (Degol,
high administrative costs relative to interest and fees received 2008).
Table 2.2: Access to Microfinance by Households
from the small loans, small-scale informal operations are Table 2.2: Access to Microfinance by Households
often distinguished as risky and not considered credit-worthy, (No. of Poor Households in Million)
poor entrepreneurs typically have few assets that can serve
No. of poor Share of poor households Percentage
as collateral, and legal and regulatory limitations may avert Households reached by MFIs
financial institutions from servicing informal businesses. Asia 123.0 83.7 68.0
Africa and Middle East 60.4 11.4 6.9
Access to finance has numerous benefits. But less Latin America &
Caribbean 9.4 1.9 20.0
than half of the households in developing countries have Eastern Europe
access to financial services, compared to over 70 percent in & Central Asia 0.8 0.2 28.8
the developed world (Degol, 2008). An increasing body of Source: Daley-Harris (2007)

economic literature provides evidence that greater financial

depth contributes to economic growth and poverty reduction
(Levine et al., 2000; Beck et al., 2000). Daley-Harris
(2006) pointed out that 3,133 MFIs in the world served 113
million families during the previous year. While that is a
laudable accomplishment, more than 500 million families
that would almost certainly benefit from microcredit remain
impoverished, while at least another 300 million more might
2 . See “Role of Microcredit in Eradication of Poverty”. Report of the UN
Secretary-General, 2000. (P. 4).
As regards households, however, the figures tell a slightly different story. Of the 193.6 million
As regards households, however, the figures tell a
poor families worldwide, only 47.8 percent were within reach of MFIs. Of the 60.4 million poor
slightly different story. Of the 193.6 million poor families
households in Sub-Saharan Africa and the Middle East, only 11.4 percent had access to
worldwide, only 47.8 percent were within reach of MFIs. Of
microcredit. Asia fared better: 68 percent of the region’s 123 million poor households had access
the 60.4 million poor households in Sub-Saharan Africa and
to microcredit (Table 2.2). Within Sub-Saharan Africa, a small number of countries are
the Middle East, only 11.4 percent had access to microcredit.
beneficiaries.
Asia fared better: 68 percent of the region’s 123 million poor
households had access to microcredit (Table 2.2). Within Sub-
Robinson (1996) stated that more than 80 percent of the world’s population does not have access
Saharan Africa, a small number of countries are beneficiaries.
to financial services from institutions, either for credit or for savings. Among them, of course,
are nearly all the poor of the developing world. Lack of savings and capital makes it difficult for
many poor people to become self-employed and to undertake productive employment-generating
activities. Providing credit seems to be a way to generate self-employment opportunities for the
poor. Because the poor lack collateral, they have almost no access to credit. The formal sector
40 H.M.W.A. HEARTH
Robinson (1996) stated that more than 80 percent of the
world’s population does not have access to financial services
from institutions, either for credit or for savings. Among them,
of course, are nearly all the poor of the developing world.
Lack of savings and capital makes it difficult for many poor
people to become self-employed and to undertake productive
employment-generating activities. Providing credit seems
to be a way to generate self-employment opportunities for
the poor. Because the poor lack collateral, they have almost
no access to credit. The formal sector does not always serve
remote rural areas. Access to these areas may be impossible
because of high transaction costs. Many poor people do not
know how the formal institutions operate and therefore do
not have access to them.
An alternative source of credit could be informal
lenders. The informal sector has more information of
production results, creditability of loan takers, alternative
sources of income and expenditures. This is why it is easier
for the informal sector to reach contractual agreements.
Poor households may not gain from investing in productive
income-increasing activities because of high interest rates in
the informal sector. The annual interest rate often exceeds
75 percent per year, typically above the urban interest rate
(Hoff and Stiglitz, 1990). This high interest rate could be
explained by risk, the monopolistic nature of credit markets
and with poverty of borrowers, that resources are directed to
activities with highest returns, application of social pressure,
flexible rescheduling of loans and that the lenders have a clear
personal knowledge of the borrowers. Loan repayments are
much higher for informal lenders than for formal lenders.
The target clients of MFIs are the poor. Microfinance
programs that are able to pool risk across agro-climatic areas
MICROFINANCE 41
are said to be able to provide credit to the poor at an affordable
cost and help them become productively self-employed.
Microfinance programs have emerged as an anti-poverty and
imperfect market instrument in many low-income countries.
They target the poor, especially women, with financial and
other services to help them become self-employed in rural
non-farm activities of their choice. It has been estimated that
there are 500 million economically active poor people in
the world operating micro enterprises and small businesses
(Degol, 2008). Most of them have not access to adequate
financial services, to meet this demand for financial services;
microfinance programs could be one important contributor.
Poor are a homogeneous mass, but highly heterogeneous
group of consumers, producers, savers, investors, innovators,
income earners and risk-averse economic actors. This
diversity forms a ‘poverty pyramid’, the several strata of
which constitute unique markets needing tailored financial
products (Remenyi, 1994).
At the bottom of the poverty pyramid are the poorest
of the poor; the socially as well as economically vulnerable
poor, including pregnant women, old people, children and
the infirm. Their vulnerability is directly attached to the
fact that the contribution they make to household income is
not adequate for their own survival. Access to microfinance
services by the vulnerable poor can create the means by which
their physical productivity is boosted and the value of their
economic activities within the home or the village is lifted.
Above the vulnerable poor are the labouring poor,
whose main source of income is selling, their labour, either
in the available marketplace or to themselves in the course
of subsistence production. Rural credit programmes in the
past were essentially targeted at the agricultural activities of
this stratum. MFIs serve the needs of poor and subsistence
42 H.M.W.A. HEARTH
farmers, but there is a purposeful attempt to concentrate on
financing activities that diversify their sources of income
beyond staple crop production.
The next highest stratum of poor persons is the
self-employed poor. Here individuals are not engaged in
subsistence activity but in producing for the market, often
on a part-time basis. The self employed poor need a working
capital and are fully integrated into the cash economy when
working as self-employed persons, even though they haven’t
given up waged labour or subsistence activity entirely. MFIs
can enable members of the vulnerable and labouring poor to
migrate into this higher stratum by funding their involvement
in income-generating activities, many of which will be part-
time and home-based self-employment options.
At the top of the poverty pyramid are the microenterprise
operators. These persons are distinguished by the fact that they
employ others, possible family members on a part time basis,
to assist them in the conduct of their business. Typically these
microenterprises will be directed at adding value to goods or
services that can be described as ‘wage-goods’ – for instance,
food, clothing, household items, transport, health services-
produced and sold in the informal sector. Here too, working
capital is often the critical need.
Thus, what are the necessary strategies that could
be used to break the vicious circle which is facing poor in
LDCs? Some economists suggest that the process would be
a balancing role of the government - and of other political
and social institutions – with the functioning of markets.
There is an increasingly influential view that the engine of
development for poor should be the informal sector, made
up of small businesses of these economies that are not
registered with the government. The entrepreneurs in the
informal sector, it is argued, are struggling not because they
MICROFINANCE 43
lack the necessary vision and skills but because they cannot
get enough money to realize their vision (Chang, 2010).
The regular banks discriminate against them, while the local
moneylenders charge high-priced rates of interest. If they are
given a small amount of credit at a reasonable interest rate
to set up a food stall, buy a motor bike, or get some chickens
to sell their eggs, they will be able to pull themselves out of
poverty. With these small enterprises making up the bulk of
the developing country’s economy, their successes would
translate into overall economic development. In spite of
lending to poor people, especially poor women, who were
traditionally considered to be high-risk cases, MFIs verified
a very high repayment ratio, showing that the poor are highly
bankable (Remenyi, 1997).
The procedure sounds perfect. Microfinance allows
the poor to get out of poverty through their own efforts,
by providing them with the financial means to realize
their entrepreneurial potential. In the process, they gain
independence and self-respect, as they are no longer relying
on handouts from the government and foreign aid agencies
for their survival. Poor women are particularly empowered
by microcredit, as it gives them ability to earn an income and
thus improve their bargaining positions vis-a-vis their male
partners (Gunathilake and de Silva, 2010; Chang, 2010).
2.2 Commercialization Approach Verses Social
Funds Approach
There are several ideas related to the meaning of the
term commercialization of microfinance and no agreement
in the field has yet emerged. Microfinance professionals
worldwide, however, are increasingly using the term to mean
“the application of market-based principles to microfinance”
or “the expansion of profit-driven microfinance operations”.
44 H.M.W.A. HEARTH
In other way “according to demand and supply forces in
the open market operators can apply various activities to
maximize profits under the given rules and regulations,
financial authority in the country.
Acceptance of a for-profit orientation in administration
and operation, such as developing diversified, demand-driven
financial products and applying cost-recovery interest rates
by the institution, and also progression in the direction of
operational and financial self-sufficiency by increasing
cost efficiency, as well as expanding outreach. Operation
as a for-profit, formal financial institution that is subject
to prudential regulation and supervision and able to attract
equity investment. Advocates of this approach rightly
argue that charging cost-covering interest rates is possible
because most clients would have to pay, and certainly do
pay, even higher interest rates to informal sources such
as village money-lenders. The recognition of building a
sound financial institution is very important to achieving
substantial levels of outreach. This means that MFIs need to
charge cost-covering interest rates and continually attempt
to increase operational efficiency. Interest and fee revenues
of a MFI have to be covered first by its operating costs and
then the cost of its loanable funds. The institution may be
considered as increasingly operating on a commercial basis
when its profitability enables expansion of operations out of
retained earnings or access to market-based sources of funds
(Charitonenko and de Silva, 2002).
Supporters of microfinance commercialization
believe that donor funds are limited and that only through
commercialization can microfinance achieve maximum
outreach. Financial institutions operating on commercial
principles tend to yield increased efficiencies, which can
translate into lower costs to low income borrowers.
MICROFINANCE 45
Conversely, social funds are demand driven mechanisms
that channel resources to the poor and support sub-projects
that act in response directly to the priority needs of the poor.
They have been used in a growing number of countries to
alleviate the social and economic effects of economic crises,
cushion the impact of adjustment programs, generate short-
term employment, and finance small-scale investment in poor
communities. Despite the attractiveness of microfinance as
a tool for poverty reduction, combining social funds which
typically provide grants to community groups. NGOs and
local governments for community development initiatives
and microfinance are a complex and even controversial
undertaking. Experience has shown, however, that if a project
is designed properly and supported with adequate technical
assistance from the beginning, microfinance components
within social funds can not only respond to a community’s
demand for financial services, but also provide the basis of a
countries microfinance industry (Charitonenko and de Silva, 2002).
Recent studies in the field of microfinance show that
the response of social funds to developments of microfinance
industry has been positive. Several of the most successful
projects have shifted their focus from reaching disbursement
targets to achieving institutional and financial sustainability
of MFIs. Also the studies show that many projects have
adopted a “phasing approach” to institutional development,
in which the microfinance program is attached within the
social fund only on an interim basis. During the first phase,
the project develops and tests its methodology and trains a
core group of staff members. During the second phase, it
expands in size and scope, develops new products, and build
staff capacity. During the third phase, it reaches institutional
and financial sustainability and is “spun off” from the social
fund or removed from government control.
46 H.M.W.A. HEARTH
The discussion above suggests that if microfinance is to
play a strong role in development, certain requirements need to
be fulfilled. First, the most crucial requirement is to perceive
microfinance lending as part of a comprehensive program of
support to the small enterprise sector. Second, a crucial part
of any future effort should be to strengthen the administrative
structures of existing MFIs to reproduce. Third, a dynamic
leadership and paid management staff are probably crucial.
And fourth, the provision of information on available services
to the poor is particularly essential.
The IFAD3 firmly believes that the poor are bankable. Its
action plan is based on three fundamental propositions. The
first stems from the fund’s mandate to address rural poverty
by recognizing the importance of microfinance as a key of
empowerment tool, in ensuring improvement in incomes
and sustainable household food security among the world’s
poorest families, especially the women of those families.
Second it recognizes the fact that, while access to credit and
saving facilities is crucial, it is usually insufficient by itself to
ensure the sustainable development of the rural poor. Thirdly,
rather than providing temporary services for the poor, the
main objective of IFAD is to develop viable and financially
sustainable rural financial systems, especially for the very
poor, living in remote areas in many developing countries4.
Degree of Success
The recent prominence given to microfinance owes
3 For an example the IFAD has funded to a rural development program
called Rural Economic Advancement Program in Matale District in Sri
Lanka. It is included microfinance components. The Central Bank of Sri
Lanka receives the funds from the donor IFAD and provides credit to six
participating agencies.
4 See, International Fund for Agricultural Development, The State of
World Rural Poverty: An inquiry into its causes and consequences (New
York, New York University Press, 1992).
MICROFINANCE 47
much to the success of a relatively few microfinance programs
and their increasing scale. The Grameen Bank of Bangladesh,
the most prominent of the success, now reaches over 2 million
people, with cumulative lending of about $ 2.1 billion. Similar
successful examples are known in Latin America (e.g. Banco
Solidario in Bolivia), in Africa (the Kenya Rural Enterprise
Program). Progress has also been recorded in several transition
economies, mixed in some cases. Such institutions not only
achieved a degree of success, but they have also managed to
attract donor support and press attention5.
Most of the analysis in developing countries reveals that
the impact of microfinance is not only changing the way credit
institutions approach lending to the poor, but also changing
the lives of the poor in the world.
Recent studies show that poverty rates have reduced
substantially in the world, but the risk of number of people
falling into poverty has increased. This is mainly due to the
neglect of agriculture of relevant poor people by governments
and international agencies, current worldwide economic crisis,
and significant increase of staple food prices and oil prices.
2.3 Some of the Practicalities of Poverty Targeting
MFIs need to target poor households, if it is to prevent
or minimize the leakage of scare resources to villagers who
are above the poverty line. Generally, people are reluctant
to reveal details of their income, not least those from poor
households. Probably this may lead to understate or overstate
their true income. Hence, for the MFIs members in the field
there is always the challenge of accurately identifying who
are genuinely poor in a village in order to concentrate their
efforts on recruiting the poor and not the ‘near poor’ or ‘rich’
5 See, http://www.grameen-info.org/meredit/unreport.html. (Accessed
3rd July 2010).
48 H.M.W.A. HEARTH
into their pool of beneficiaries. However, many strategies
have been implemented to achieve this goal and over time,
several cost-effective and reliable ‘proxies’ of income have
been identified. Some of the proxies for household income
were; assets ownership, housing condition, information
from other members of the village etc. Also in this present
study some of the proxies for household income and socio-
economic development may be used where it is necessary.
Modeling income-poverty, income-vulnerability, and Women
Empowerment Index, study have used proxies for explain the
socio-economic and financial changes of microfinance clients.
Likewise, some of the writers (Remenyi, 1997) have
highlighted the features that should be with microfinance
borrowers; Character: means how a person has handled past
debt obligations: from credit history and personal background,
honesty and reliability of the borrower to pay credit debt is
determined. Capacity: means how much of debt, a borrower
can comfortably handle. Income streams are analyzed and
any legal obligations looked into, which could interfere in
repayments. Capital: means current available assets of the
borrower, such as real estate, savings or investment that could
be used to repay debt if income should be unavailable. The
practical problem is that the microfinance providers cannot
easily find out the active borrowers with above mentioned
characteristics.
2.4 Impact of Microfinance on Poverty and Vulnerability
Microfinance is increasingly recognized as an effective
instrument for poverty reduction. Recent studies in various
countries suggest that microfinance has the potential to reduce
poverty significantly through strengthening crisis-coping
mechanisms, diversifying income-earning opportunities,
building financial and other assets and improving socio-
MICROFINANCE 49
economic condition of the poor (Swain et al. 2008, Abed
and Matin, 2007; Khandker and Pitt, 2005; Robinson, 2002;
Khandker, 1998; Hashemi et al., 1996; Montgomery et al.,
1996; Husain, 1998). According to Morduch and Haley
(2002), microfinance has proven to be an effective and
powerful tool for poverty reduction. Simanowitz (2001)
pointed out that the impact of microfinance on poverty
alleviation has recently gained a prominent position on the
microfinance agenda. Donors, Practitioners, and Academics
are realizing that MFIs must concern themselves with more
than their ability to reach institutional self-sufficiency. The
ability to reach and to demonstrate a positive impact on
the poorest is now becoming a core principle in poverty-
focused financial institutions. Cuong, Pham and Hinh. (2007)
in Vietnam have confirmed the positive and statistically
significant impact on per capita consumption expenditure
and per capita income of participating clients in microfinance
programs. Parallel confirmations were reported by Chowdhury
(2007), and Khandker (2005) in Bangladesh. A positive
effect of microfinance on clients’ income empowerment was
also reported by (Javed et al., 2006), and Abbas, Sarwar and
Hussain (2005) from Pakistan. In Sri Lanka, Colombage,
Ahmad and Chandrabose (2008) have concluded that
microfinance has positive impact on client’s socio-economic
development at various levels such as at family level, at
business level, at community level and at individual level.
However, microfinance may not be able to eradicate
poverty but is a component of the fight against poverty
and vulnerability of poor people. The services provided by
MFIs to poor households can make a significant difference
to economic welfare and the capacity for self-reliance and
economic and social empowerment. There is no doubt that
microfinance benefits the poor. The weight of evidence
from the very few but increasing number of surveys and
50 H.M.W.A. HEARTH
case studies were confirmed this. Hulme and Mosley (1996)
concluded that well designed credit schemes can raise the
income of significant numbers of poor people (p.114). Poor
people remain at low income levels for many reasons, but the
advocates of microfinance are convinced that an important
contributor to their inability to escape from poverty and
retain a place in the economic spectrum above the poverty
line is their lack of access to microfinance. Investment by
the poor is low not because poor people do not save, nor it
is because they have few investment opportunities, are lazy
or know better. Increased investment by poor households in
self-improvement, the accumulation of productive assets,
or in micro enterprises are facilitated by MFIs. Some of the
efficient activities provided by the MFIs can be stated as:
(1) meet the needs of the poor for working capital. (2) offer
relevant investment advice. (3) present productive savings
options to compete with asset hoarding. (4) offer insurance for
risk management or life-cycle savings. (5) respond rapidly and
flexible to unplanned changed circumstances or misadventure.
(6) provide advice on flexible money management tailored
to the circumstances of poor households. Implementing
these activities/practices, MFIs enable poor households to
attain higher income levels, decline unemployment, improve
productivity, invest in upgrading existing productive assets or
attain additional productive assets, get higher returns for goods
and services marketed, and lower livelihood and production
costs as a result of technology transfer.
Morduch and Haley (2002), show that, like many other
development tools, it has insufficiently penetrated the poorer
strata of society. The poorest form the huge majority of those
without access to primary health care and basic education;
similarly, they are the majority of those without access to
microfinance. Therefore, microfinance is an appropriate tool
by which to reach the millennium goals. Further, the evidence
MICROFINANCE 51
shows the positive impact of microfinance on poverty
reduction as it relates to the first six out of eight millennium
goals. Robinson (2001) states that, “among the economically
active poor of the developing world, there is strong demand
for small-scale commercial financial services - for both
credit and savings. Where available, these and other financial
services help low income people to improve household and
enterprise management, increase productivity, smooth income
flows and consumption cost, enlarge and diversify their
micro business and increase their income”(p.5). According
to Hossain (1988), “GB members had income of 43 percent
higher than the target group in the control villages, and about
28 percent higher than the target group of non-participants
in the project village”. Schuler, Hashemi and Riley (1997),
Holcombe (1995), Otero and Rhyne (1994); Remenyi (1991),
also confirmed that microfinance brings about immense
socioeconomic benefits including income generation ability
and vulnerability reduction of clients.
Household income with access to credit is significantly
higher than for comparable households without access to
credit. In Indonesia a 12.9 percent annual average rise in
income from borrowers were observed while only 3 percent
rise were reported from non-borrowers (control group)
Remenyi and Benjamin (2000). They explaining further
that, in Bangladesh, a 29.3 percent annual average rise in
income was recorded and 22 per cent annual average rise in
income from non-borrowers. In Sri Lanka, indicated that a
15.6 percent rise in income from borrowers and 9 percent rise
from non-borrowers. In the case of India, 46 per cent annual
average rise in income was reported among borrowers with
24 per cent increase reported from non-borrowers. The effects
were higher for those just below the poverty line while income
improvement was lowest among the very poor. There are many
practitioners who would be happy about MFIs admission of
52 H.M.W.A. HEARTH MICROFINANCE 53
new members from households that are below the poverty impact on the per capita expenditure of the clients, this is
line but not the most vulnerable, the poorest of the poor. It less than formally expected. Rogaly (1996), and Morduch
is possible that because outreach to the poorest of the poor (1998) have founded that microfinance has minimal impact
is especially difficult and costly, MFIs will find it easier to on poverty reduction. While, Kabeer (2001) has shown that
achieve financially viable growth if they concentrate on the small-scale credits lead to negative empowerment and lead to
higher strata of the poverty pyramid? debt trap of women. Hulme and Mosley (1996), Mosley and
These studies verify the impact of microfinance on Hulme (1998), and Fernandez (2005) pointed out that even
household income and show that participants of such programs though microfinance interventions have several beneficial
poorest of the poor is especially difficult and costly, MFIs will find it easier to achieve
generally have higher and more steady income than, they did effects on poverty and vulnerability reduction, they do not
financially viable growth if they concentrate on the higher strata of the poverty pyramid?
before they joined the programs. help the poor, as is so often claimed.
These studies verify the impact of microfinance on household income and show that participants Colombage (2004), found that in the case of Sri
of such programs generally have higher and more steady income than, they did before they
Table 2.3: Increase in Family Income of Borrowers and Lanka, although microfinance has several positive impacts
joined the programs.
Control Groups of Non- borrowers on client’s livelihood development, variables such as lack
of entrepreneurial skills, small size of loans, investing in
Annual average Annual average low value added activities, limited product diversification,
Country change in family change in family
income % 1988-92 income % 1988-92
and poor physical infrastructure adversely affect the clients’
socio-economic development. Meanwhile, Bello (2006) stated
Borrowers Control group
that microfinance is a good tool as a survival strategy but it is
Indonesia 12.9 3.1
Bangladesh 29.3 22.2 not a key to development. The vulnerable poor should not be
Sri Lanka 15.6 9.9 under-privileged of access to microfinance just because they
India 46.0 24.0
have fewer investment opportunities than their rich neighbours
Source: Hulme and Mosley (1996); McCulloch and Bob (2000), and Robinson (2001). (Mosley and Hulme, 1998).
Microfinance is not for everyone. Most importantly,
In contrast,
In contrast, somehave
some researchers researchers have
argued that the argued
poorest of thethat
poorthe
(thepoorest
hardcore poor) are entrepreneurial skills and ability are necessary to run a
of the poor
excluded from (the hardcore
microfinance poor)
programs are excluded
(Hashimi, 2001; Matinfrom microfinance
and Hulme, 2003; Ahmed et al., successful micro enterprise and not all potential customers
programs
2006; Pronyk (Hashimi, 2001; Matin
et al., 2007; Daley-Harris and Hulme,
and Zimmerman, 2009;2003;
BanerjeeAhmed et While
et al., 2009). are equally able to take on debt. While these points will be
al.,
other2006; Pronyk
researchers, Adamsetand al.,von2007;
PischkeDaley-Harris and Zimmerman,
(1992), Buckley (1997), Wood and Shariff (1997), true across all strata of poverty, it is assumed that they will
2009;
and Oommen Banerjee et that
(2008) stated al.,there
2009).
are no While other
considerable researchers,
positive impacts by microfinance have a great effect on the very poorest. On the other hand,
Adams and
interventions but von Pischke
negative (1992),
impacts. A Buckley
recent study (1997),
in Bangladesh Wood
(Chemin, 2008)andindicates that as mentioned earlier, the sick, mentally ill, destitute etc.
Shariff (1997), and Oommen (2008) stated that there are
although microfinance has a positive impact on the per capita expenditure of the clients, no this is who form a minority of those living below the poverty line
considerable
less than formallypositive
expected. impacts by microfinance
Rogaly (1996), and Morduch interventions
(1998) have founded that are typically not good candidates for microfinance. There is
but
microfinance has minimal impact on poverty reduction. While, Kabeer (Chemin,
negative impacts. A recent study in Bangladesh (2001) has shown that little evidence that clients with existing micro enterprises or
2008) indicates
small-scale credits lead that although
to negative microfinance
empowerment has
and lead to debt trapaofpositive
women. Hulme and employment (often defined as “the economically active”) are
Mosley (1996), Mosley and Hulme (1998), and Fernandez (2005) pointed out that even though
microfinance interventions have several beneficial effects on poverty and vulnerability reduction,
they do not help the poor, as is so often claimed.
54 H.M.W.A. HEARTH
the only ones that can benefit from microfinance. Hulme and
Mosley (1996), McCulloch and Bob (2000), and Robinson
(2001) stated that anti-poverty programs often assume that
poverty is static.
From the studies reviewed above we can conclude that
even though many of them illustrate that microfinance has
had a positive impact on poverty and vulnerability reduction,
there is a debate over the level of impact and on poverty and
socio-economic vulnerability, and about whether microfinance
is reaching the poorest of the poor. Also, many studies have
revealed that several internal and external constraints avoid the
path way of development of small enterprises through small
loans in developing economies (Colombage et al., 2008).
2.5 Microfinance and Women Empowerment
It is widely accepted that the microfinance programs
that target women have greater empowering potential,
because they are usually marginalized economically as well
as socially, in society. Microfinance services enable women to
develop their own income-generating activities, and thereby
to foster internal attitudes (self-reliance, self-confidence and
self-worth). The participation of women in microfinance will
also able to develop their internal relations such as greater
bargaining power within the household and leadership in the
community (Sharma, 2011). Small groups, which form the
foundation of most microfinance programs, empower women
through mutual support, exchanging of new ideas, group
responsibility and leadership. Todd (1996) has mentioned that
in poor households, and especially the poorest households,
resources are highly fungible and it is rarely possible to
determine whose money is used by whom and for whose
benefit. Todd shows that the motivation of a female borrower
is often drawn from her ability to help her husband, sons, or
other relatives, attain higher status and economic prospects.
MICROFINANCE 55
The act of accessing a new source of loan or other financial
services is rarely taken independently. Therefore, while
research into the gender dimension of the distribution of
the benefits of MFIs should actively intensify awareness to
gender issues, it has not damaged the claim that poor women
are major beneficiaries of MF programs. Amin and Pebley
(1994); Naved (1994); Hashemi Schuler and Rily (1996);
Pitt and Khandkar (1998) investigated the microfinance
and the empowerment of women. Colombage, Ahmad and
Chandrabose (2008) constructed Women’ Empowerment
Index to examine female participation in decision making
for agricultural and non-agricultural activities. They have
concluded that microfinance has a positive impact on women’s
socio-economic development at family level, at business level,
at community level and at individual level.
The need to endorse groups and other social mechanisms
for the useful delivery of microfinance services has long been
recognized. Whether, the Grameen Bank in Bangladesh
style groups, solidarity groups, self-help groups, village
banks or savings and credit-cooperatives, they all rely to
greater or lesser extent on trust or social capital that exists
among members of the group. This social capital enables the
MFIs to reduce its transaction costs by giving the group the
tasks of selecting and monitoring borrowers, exerting peer
pressure when necessary, even granting each others loans.
Such types of benefits to the microfinance practitioners, in
which significantly reduce its costs. This task is sometimes
referred to as ‘social intermediation’. “Successful financial
intermediation is often accompanied by social intermediation.
Social intermediation prepares marginalized groups or
individuals enter into solid business relationship with MFIs”
(Fisher and Sriram, 2002, pp.104). Social capital of this
kind is much more important for those who do not have
access to formal credit markets. People who lack physical
56 H.M.W.A. HEARTH
capital to offer as collateral effectively pledge their social
connections. Therefore, people’s associations can generate
concrete monetary and economic benefits (Jayamaha, 1990;
Dissanayake, 1991). According to [in] Uphoff (2000), sources
and magnitude of benefit flow from social capital have been
analyzed using a case study of the development of small
farmer groups and water management system, carried out with
the social networks of the Gal Oya irrigation system 1980 in
Sri Lanka. It had proved that a good “income stream” flow
from social capital in terms of beneficial collective actions
improved the quality of life, spirit of unity, skill, savings and
loan operation activities among the farmers. Fukuyama (1995)
stated that the ability of strangers to trust one another and to
work together in new and flexible forms of organization is
crucial for economic development.
Putnam (1993, and 2002), through his seminal studies
in Italy and United States, tries to show that norms and
networks of civic engagement strongly influence the quality
of public life and the performance of public institutions. One
of the major findings is that the northern part of Italy had
higher levels of output per capita and better governance than
the southern regions, due to greater endowments of social
capital. The theoretical demonstration of Ghatak (1999) on
the group lending programs utilizes joint liability strategy to
gain local information; borrowers have about each other’s
projects through self-selection of group members in the
group formation stage. He shows that even if MFIs do not
screen borrowers there will be positive associative matching,
better quality borrowers will match with other better quality
borrowers and not with poor borrowers. He has illustrated
a model of individual liability contract and joint liability
contract to get the equilibrium in the group formation game
and credit market equilibrium with adverse selection. The
MICROFINANCE 57
analysis shows that joint liability will always improve
repayment rates and efficiency (aggregate surplus) compared
to lending with individual liability. The welfare analysis shows
that group lending increases repayment rates and also welfare,
due to social collateral and peer selection by members of the
lending group. But it is not guaranteed that every borrower
will be better off under group liability.
Besley and Coats (1995) investigate the impact on
repayment rates of lending to groups which are made joint
liable for repayment. The example of Grameen Bank has
been exploited to model the concepts. They set up and
analyzed the “repayment game” which group lending give
rise to. The suggestions are group lending have positive and
negative effects. The positive effects are the successful group
lending members may have an incentive to repay the loans of
members whose projects have yielded insufficient return to
make repayment worthwhile. The negative effect arises when
the whole group defaults. Besley and Coats (1995) show how
group lending may harness social collateral which serves to
mitigate its negative effects.
Evidence has shown that it is easier to establish
sustainable financial intermediation systems with the poor
in societies that encourage cooperative efforts through local
clubs, temple associations, or work groups. In other words,
societies with high levels of social capital, perhaps more
than any other economic transaction, financial intermediation
depends on trust between the borrower and the lender. Where
neither traditional systems nor modern institutions provide a
basis for trust, financial intermediation systems are difficult
to establish. Social intermediation can thus is understood
as the process of building the human and social capital
required for sustainable financial intermediation with the poor
(Legerwood, 1999, PP. 76-77). As this question makes clear,
58 H.M.W.A. HEARTH
social intermediation is regarded as an instrument to enable
effective delivery of micro financial services.
Groups are an unregistered group of people (the number
of members in the group can differ from country to country)
from a homogeneous group who come together for addressing
their common economic problems. They are encouraged to
make voluntary savings on a regular basis. They use these
savings to make interest bearing loans to their members. This
process i.e. saving, lending, and recovering it back, are the
essentials of financial intermediation including prioritization
of needs, setting terms and conditions and keeping financial
accounts. This helps in building financial discipline and more
importantly, credit history for themselves, as the money
involved in lending is their own ‘warm money’, the lending
is done very carefully and the entire money is recovered. Also
group members learn to handle larger sums of money which
are much beyond their individual savings. This process also
makes them to understand the basic principle of banking that
money has a time value and is a scare resource. In Sri Lanka,
microfinance studies show that poor women are particularly
empowered by microcredit, as it gives them ability to earn an
income and thus improve their bargaining positions vis-a-vis
their male partners (Gunathilake and de Silva 2010). Another
recent study (de Mel et al., 2008) have found that returns to
capital were zero among female-owned microenterprises
but in excess of nine per cent per month for male-owned
enterprises, while, Kabeer (2001) shows that small-scale
credits lead to negative empowerment and leads to debt trap
of women.
From banks perspective, they are taking the advantage
under the system of lending to a group and the group takes
the responsibility of prioritizing the loan demands from the
members and fixing the terms and conditions of sanction.
In other words, the banks get the advantage of lending
MICROFINANCE 59
to those who have experience in borrowing and repaying
and additionally major part of their costs of sanctioning,
disbursing, monitoring and recovering are externalized.
The important features of the product developed under the
group -bank linkage program are as follows: (1) groups of
homogeneous people from similar economic background
living in the neighborhoods. (2) focus on women. (3) saving
first, credit later and small fixed savings at a regular interval.
It helps in building up financial discipline. (4) credit rationing:
the group to prioritize the request of loans from members. This
also builds group pressure for timely repayment. (5) shorter
payment period. (6) progressive lending. (7) no subsidies. (8)
the group deciding the quantum as also the term and conditions
for, loans to members. (9) no subsidization of interest. (10)
transparent operations.
2.6 Criticisms of Women Empowerment through
Microfinance
Some of the researchers argue that micro credit taken
by women clients might end up being redirected to the male
household head, who is actually carrying out the investment
project and investing the money borrowed by women. In
Bangladesh a survey proves that 37 per cent of women have
little or no control over their own investment activities.
Only 63 per cent have control6. Evan 63 per cent women
participation in microfinance program is an important factor
in country of Muslim women. It happens sometime that the
man may hijack the loans taken by women; in some cases
women are forced to hand over the loan money to the man.
Some women think this alternative is a better choice when
the micro business gets larger and prosperous the men use to
talk over the business activity.
6 Goety Ann Marie and Rina Sen Gupta, “Who takes the credit? Gender
power and control over loan use in rural credit program in Bangladesh,”
World Development (1996).
60 H.M.W.A. HEARTH
Another argument quotes, “women are worse off with
micro credit, as result of loan or activities in which they are
invested women face increased tension and violence in the
house, male economic withdrawal, abandonment. The increase
in access to income and often at the cost of a heavier work
load will adversely affect on women health and wellbeing.
To settle some cases microfinance programs have led to join
action to deal with issues such as violence, male alcohol
abuse, dowries and harassment by official authorities”.7 In
the case of empowerment some argue that male entrepreneurs
may expand enterprises more aggressively, when given
access to credit. Lending to women for poverty reduction
or empowerment and lending to men for economic growth
through income generation. All these arguments are based
on incident that occurred in different environments. In 1970s
number of countries identified that credit is main constraint
of women poverty alleviation. Since 1970 worldwide MFIs
included credit and savings as a way of increasing women’s
income. In 1980s institutions like Grameen Bank, ACCION
and others targeted women and other gender issues.
In the 1990s the combination of high female loan
repayment rate and increase gender issues led to change the
emphasis and targeting women empowerment. The world
higher level of women poverty also considers including
the empowerment of women through micro financing. The
microfinance is the entry point for women’s economic,
social and political empowerment. Rather than some isolated
arguments, the socioeconomic empowerment of women
concerns gender equality and women’s human rights.
The most disadvantaged women are women labourers,
home workers, agriculture labourers, low income industrial
workers, bonded labour, migrant labour, women in the difficult
7 Indian Institute of Banking and Finance, “Microfinance Perspectives and
Operation” MacMillon, India, New Delhi (2009).
MICROFINANCE 61
households’ circumstances, and women at risk of violence,
women in unsustainable relationships, disable and elderly
women, and women in remote areas. All these women do
not have fundamental and human rights and it is essential to
empower them to leave in safety environment sustainably.
According to the studies reviewed above it is obvious
that even though many of them illustrate that microfinance has
had a positive impact on poverty and vulnerability reduction
of women borrowers, there is a question about the level of
impact and on socio-economic empowerment of women, and
about whether microfinance is reaching the socially isolated
poor women. These many studies also comprise that several
interior and exterior constraints avoid the pathway of women
empowerment through micro loans. Thus, it is worthwhile
to examine the potentiality of microfinance of poverty and
vulnerability reduction, ability of social capital formation, and
effectiveness of credit-plus services in developing economies.
In Chapter four of this book, using two leading MFIs,
SEEDS and TCCSs in Kandy District in Sri Lanka as case
studies, investigated the impact of microfinance on poverty
and vulnerability reduction of women clients, and impact
of credit-plus services on income empowerment of women.
Further, it explored the relationship between social capital
formation through microfinance intervention and its economic
and non-economic outcomes on women headed households.
Most importantly, this study attempted to contribute to the
above mentioned debate and discourse on microfinance as a
weapon to combat against poverty.
62 H.M.W.A. HEARTH
CHAPTER THREE
Microfinance Intervention Process in Sri Lanka
3.1 Historical Overview
In Sri Lanka, the origin of micro financing can be
outlined back to the early 1900s. In 1911, the British
government passed legislation to set up credit co-operatives
in Sri Lanka. However, the government did not interfere with
the activities of the co-operatives in the initial phase up to
1942. Village superiors like landlords and village headman
dominated the co-operative societies. These societies did not
show much growth during the initial phase. Following the
food shortages originated from the Second World War, the
government got involved in the co-operative movement in the
second phase that began in 1942. The government initiated
forming co-operative Agriculture Production and Sales
Societies (CAPS) and provided credit facilities to them. The
number of CAPS rose from 26 societies with 8,694 members
in 1947 to 994 societies with 247,000 members in 19571.
In the post independence period, the government
concentrated largely on agricultural credit, particularly for
paddy cultivation. These credit facilities were granted mainly
through two state banks, the Bank of Ceylon and People’s
1 See Gant, R., de Silva D., Atapattu A., and Durrant, S. (2002) National
Microfinance Study of Sri Lanka: Survey of Practices and Policies. Jun
2002, Colombo, Aus AID and GTZ, Colombo.
MICROFINANCE 63
Bank. Under various rural credit schemes, the Central Bank
provided funds to the two banks at subsidized interest rates.
These cultivation loans were written off in many instances
due to political pressure. In 1964 the government established
the Co-operative Rural Banks. This was a major contribution
in the field of microfinance. However, microfinance, in its
strict sense, was not evident in Sri Lanka until 1986. During
1986-1991 the government initiated an arrangement of
policy measures to expand credit facilities to the poor under
its poverty alleviation strategy. The ministry of finance and
the Central Bank initiated the Regional Rural Development
Banks in 1986. As a major poverty alleviation strategy, the
government launched the Janasaviaya program in 1989. Under
that program, the poorest families who received Janasaviya
benefits were assisted with credit facilities for viable self-
employment projects with a view to promoting income
generating activities on a sustainable basis. The government
established the Janasaviya Trust Fund in 1990. The Small
Farmers and Landless Credit Project were launched by the
Central Bank in 1991. All those programs had some form of
microfinance component.
In 1996, the government replaced the Janasaviya
program with the Samurdhi Development and Credit Scheme
to promote income generating self-employment opportunities
among the poor so as to raise their income levels and thereby
making them self-reliant and self-supporting. In 1997, the
government established the Samurdhi Authority and its
microfinance scheme. Under that scheme, the beneficiaries
were eligible to obtain loans for undertaking new income
generating activities or expanding an existing business. As
part of this movement, Samurdhi Bank Societies were set up
throughout the country to promote savings and to disburse
credit. The other major institutions and programs that provide
microfinance facilities include Regional Development Banks,
64 H.M.W.A. HEARTH
SEEDS, Gami Pubuduwa Scheme, TCCSs, Janasakthi
Banking Scieties (in Hambantota) and Women’s Development
Federation (in Hambantota). Apart from these major MFIs,
there are thousands of other organizations involved in small
credit delivery spread all over the country.
In terms of current involvement of the government in
microfinance, the Central Bank Rural Credit Department
remains the key government agency responsible for rural
credit and for microfinance outside the Samurdhi Authority.
In fact the difference in emphasis between rural credit
and microfinance showed that no government agency was
responsible for or focused on policy aspects of microfinance
exclusively. In 1992, the presidential Commission on Banking
and Finance recommended that the Central Bank of Sri Lanka
confine itself to its traditional supervisory role and shed its
development role. Despite this, it began a new microfinance
project, Poverty Alleviation Microfinance Project (PAMP),
with Japanese funding, as well as continued to implement
the Small Farmers and Landless Credit Program, and own
majority shares in the Regional Development Banks.
The Central Bank of Sri Lanka, which is the government
agency responsible for the supervision of banking and non
banking agencies, has no capacity to supervise the large
spectrum of microfinance agencies and work spread all over
the country (Gant et al. 2002). The Cooperative Department,
responsible for supervising key agencies such as the
Cooperative Rural Banks and TCCS is equally incapable of
even auditing its agencies. Thus, today microfinance in Sri
Lanka is by and large an unsupervised, unregulated area. Even
though, the substantial growth of microfinance in Sri Lanka
in the last 20 years, there has been no attempt to regulate the
institutions providing this service. The key reason why some
regulations are required is the huge amount of savings that the
MICROFINANCE 65
poor entrust to these organizations. As the individual amounts
are small from a national perspective the key agencies such
as the Central Bank of Sri Lanka of the Finance Ministry
does not appear to give this issue sufficient attention. At the
movement there are no safeguards or are very few for savers in
these schemes including all NGO programs, the Cooperative
Programs and even some of the government programs. In due
course this could become a serious problem.
The current laws do not permit NGO’s to take deposits
even from its members as the Banking and Finance Act of
1998 restricts deposits to only banks and finance companies.
This prohibition covers all aspects of savings whether it is
from members or non-members or whether it is as a guarantee
for a loan or not. If NGO’s take any deposits, then they must
deposit them in turn in regulated financial institutions and are
not permitted to lend even a part of them.
Although, Sri Lanka has developed a widely diversified
microfinance system, it operates at a very low level compared
with international standards2. The core problem is the poor
quality of the microfinance services offered, indicated by
insufficient reaching out, low repayment, low cost efficiency
and financial products which are not client driven. This
situation seriously threatens the sustainability of the offered
financial services and their outreach to poorer households,
micro and small enterprises. High costs and limited access
to finance are the two of the most crucial obstacles to reach
higher economic growth, especially in the rural areas3.
The main causes of the poor performance of MFIs lie in
the inadequate qualification of the MFI staff and the fact that
2 ProMis (GTZ) Sri Lanka – German Development Cooperation, Ministry
of Finance and Planning, Colombo, 2002.
3 The Investment Climate of Sri Lanka, Joint Study, the World Bank and
Asian Development Bank, 2005.
66 H.M.W.A. HEARTH
the government of Sri Lanka has not yet designed a national
sector policy for a sustainable microfinance sector (Gant et
al., 2002). Another problem lies in the lack of an organized
regulatory and supervisory structure which encompasses
all MFIs. Commercial Banks engaged in the microfinance
business are regulated and supervised by the Central Bank.
The multipurpose co-operatives such as the savings and
credit co-operatives are supervised by the Department for Co-
operative Development. Most local as well as international
NGOs engaged in microfinance are neither regulated nor
supervised although most have mobilized saving deposits
from the general public. These institutions are weakened
by politically motivated debt relief-often ahead of elections
which seriously endangers the repayment culture among its
clientele. Further cause lies in the insufficient infrastructure
for training, further education and advisory services to provide
immediate and relevant practical advice. The negative impacts
which results from all of the above are the insufficient supply
of financial services to needy people in the society and micro
and small enterprises.
3.2 The Microfinance Landscape in Sri Lanka
Microfinance activity in Sri Lanka is both a traditional
community activity and a tool for economic development,
with the clientele being mainly the poor. As mentioned
above, microfinance in Sri Lanka is practiced by a broad
range of different organizations for purposes of poverty
alleviation, social and community development and as a
multi-faceted intervention tool in areas affected by conflict.
The rationale, methods and models behind such schemes vary
significantly according to the actor. At the same time, issues
of sustainability, political capture, standard of professionalism
and transparency are to the fore throughout.
MICROFINANCE 67
Mainly, microfinance intermediaries in Sri Lanka can be
categorized into four groups which are professional national
level MFIs, local NGOs, INGOs and government programs.
In terms of the provision of lending services one funder
has recently become a granter-lender. This along with the
existence of the presence of the national lending institutions
means that there would appear to be adequate access to
wholesale and retail funding for the professional MFIs. Most
international funding organizations that target development
aid to Sri Lanka have been granting monies for microfinance
projects for the purpose of poverty alleviation for some time4.
They are also funding microfinance activities for issues related
to using microfinance as a ‘membership’ tool to help increase
civil society and community rehabilitation5.
Most of the INGOs and multilateral agencies operating
in Sri Lanka practice microfinance activities currently.
However, the use of microfinance in different institutions as
an intervention tool varies widely. Poverty alleviation and
sustainable livelihoods are key themes, but they are also used in
emergency situations, for purpose of educational development,
housing construction, to empower women, to decrease
household vulnerability, too to increase child protection, to
build-up civil society, to rehabilitate communities and for
purposes of income generation and enterprise development.
Methods of implementation vary widely among the different
institutions. As a rule, microfinance activity takes place
4 For an example the IFAD has funded to a rural development program
called Rural Economic Advancement Program in Matale District in Sri
Lanka.
5 Most microfinance funders believe that micro lending and related
services has proven to be an effective intervention tool for alleviating
poverty in Sri Lanka. However, there is an increased emphasis on the use
of ‘soft’ policy tools such as training and technical assistance rather than
‘hard’ financial instruments.
68 H.M.W.A. HEARTH
through the economic mobilization of groups and societies
at the village level often utilizing some sort of initial funding
and technical assistance activity as key intervention tool;
but there is a vast variance in the exact methods and models
used. Some work directly with community and village based
organizations, others implement indirectly through NGOs,
co-operatives and government partner organizations, while
yet others do both6.
At the national level, the Samurdhi Authority has the
largest social mobilization program and is the fastest growing
microfinance scheme in the country having effectively
mobilized many villages that were not covered by other
existing programs. There is evidence to suggest that the
Samurdhi program has been effective in its goal to reach the
poorest section of the population in country. On the other hand,
there is concern that Samurdhi will remain open to political
capture and will fail to increase its transparency, restructure
or attain financial sustainability. At present, the program is
expanding to North and East regions of Sri Lanka. The target
group is the poorest strata of the society that receive assistance
from government due to their poverty. It is also the most
recent of all the microfinance programs started in 1997. The
Samurdhi program has three major components. The first is
the provision of a consumption grant transfer (food stamp) to
eligible households. This component claims 80 percent of the
total Samurdhi budget. The second component of Samurdhi
is a savings and credit program operated through Samurdhi
banks, and loans meant for entrepreneurial and business
development. The third component is rehabilitation and
development of community infrastructure through workfare
and social (or human) development programs.
6 According to some writers in the field, the implementation procedures of
different MFIs broadly categorized into two parts; they are the minimalist
approach and the credit-plus approach.
MICROFINANCE 69
Small group savings are “encouraged” among Samurdhi
recipients. Gunatilake (1997) reported that members as being
“herded into groups” by officers. Savings could be used for
rotating credit or depositing in Samurdhi banks. Samurdhi
banks are established as cooperatives, and to become a
member a Samurdhi beneficiary. Non-members can establish
accounts, but only members are eligible for Samurdhi banks
loans. There are different types of accounts, with the deposits
being available for withdrawal at different times and earning
different interests. Most of the deposit base comes from the
small group savings. Samurdhi banks issue loans to members
mostly for agricultural and self-employment activities.
Repayment begins from the date the loan is issued. Income-
generating loans are available at 3 percent interest rate per
month, consumption loans are offered at a lower rate.
Samurdhi officers act as bank staff. Premises are
built by beneficiaries, and equipment is provided by the
Samurdhi Authority. The board of directors usually consists
of members of balakayas. A typical bank would have about
fifteen members from each balakaya on its board. Samurdhi
banks are not supervised or audited by the Central Bank and
do not fall under the Finance Act. Supervision and auditing is
carried out by the Samurdhi Authority. There are no uniform
rules governing the financial instruments of these banks. Loan
insurance, for example, ranges from 1 to 4 percent of the
amount of a loan among individual banks. Banks may make
other deductions when disbursing these loans (for example,
for the group insurance fund, for the common fund for write-
offs of unrecovered loans, etc.). Deposits are not insured by
the Government of Sri Lanka (World Bank, 2003).
There is a significant women participation in Samurdhi
groups, societies and banks. 60 percent of members are
women and 65 percent of chairpersons of village societies are
70 H.M.W.A. HEARTH
also women. This is the largest social mobilization program
in Sri Lanka with savings and credit operations occurring
at small group level, society level and bank level. A study
conducted by Institute of Fundamental Studies in May 1999
showed that in a random sample of 163 Samurdhi recipients,
as many as 137 or 69 percent had never saved in a formal
financial institute prior to the introduction of Samurdhi. This
clearly indicates that despite the growth of so many agencies
and projects for microfinance since mid 1985, these were still
not reaching bulk of the poor population in the country. There
are many credit schemes under the Samurdhi program. The
two most important credit schemes besides loans at society
level are credit through Samundhi Banks and animator credits.
The average annual interest rate for Samurdhi Banks
credit is 24 percent. Average repayment rate of credits was
100 percent by the end of December 2000 (100 percent
refers to payments in advance and perhaps to social and
political pressure). Thus, excluding advance payments the
on time repayment rate is 92.6 percent. Very close follow
up due to high staff levels and peer pressure accounts for the
good repayment rates. By purpose 71 percent of Samurdhi
Bank loans were taken for self-employment, 24 percent
for agriculture, 1.3 percent for fishing, 3.8 percent for
consumption smoothing and 2.7 percent for emergencies.
The Samurdhi program has credit-plus services such as
rural infrastructure development, agriculture extension and
training, livestock extension and training, and special projects
including marketing development.
The Samurdhi program has many strengths as well
as weaknesses. Without doubt it can be identified as an
exceptional program for the poor. However, there needs to
be urgent action to get rid of its weaknesses and to maximize
the strengths. Strengths are: (1) It has reached and is reaching
MICROFINANCE 71
a large amount of the poor left out by previous formal
microfinance intermediaries. (2) the microfinance program is
not donor dependent and is entirely based on savings of the
people for capital. (3) it has a good accounting and monitoring
systems. (4) the program has excellent on time repayment
rates. Weaknesses are; (1) government control of the program,
and political capture of the staff. (2) over staff through political
corruption is fairly obvious as for instance there are over
22,000 Samurdhi animators. Therefore, it is recommended
that there is a need for an unbiased and in depth study of the
program to arrive at clear conclusions on re-structuring the
program and moving it out of the political track.
As a local NGO, SEEDS has been in existence since
1986 as the economic arm of the Sarvodaya Movement. Its
goal is to facilitate the eradication of poverty by promoting
the economic empowerment of the rural people and working
with them towards creating sustainable livelihoods. SEEDS
is clearly the most professional and transparent MFI in Sri
Lanka7. From its beginnings operating in 80 societies in 5
districts it has expanded to a national level project, operating
in over 2,600 societies, covering more than 5,000 villages, in
18 districts, around nearly a half a million people (SEEDS,
1999). In 1998 SEEDS converted to a separate legal body
registered under the Companies’ Act as a company limited by
guarantee, allowing it to raise finance and contract as a legal
entity in its own right.
SEEDS enable Sarvodaya members to pursue their
income-earning activities more successfully, firstly, through
making capital available at fair rates of interest, and secondly,
through providing training, information, advice and product
7 See Gant, R., de Silva D., Atapattu A., and Durrant, S. (2002) National
Microfinance Study of Sri Lanka: Survey of Practices and Policies. Jun
2002, Colombo, Aus AID and GTZ, Colombo.
72 H.M.W.A. HEARTH
marketing support towards improving their business and
technical skills (SEEDS, 2000). SEEDS believe that economic
empowerment plays a crucial role in poverty eradication, but
that economic empowerment is not only increasing income
levels, but also increasing people’s economic discipline
and awareness, as well as building knowledge, abilities and
the potential for livelihood improvement. SEEDS’ primary
clientele are the membership of the Sarvodaya Shramadana
Societies that provide the channel for SEEDS activities.
Generally, they are low-income earners or those who do
not have the opportunity to access finance from the formal
banking sector. Recently, with commercialization SEEDS
has extended its services to a wider market, including the
provision of credit for solar home systems to non-members.
Currently, SEEDS estimates that 80 percent of its clientele
are members of Sarvodaya societies with the remaining 20
percent of its members coming from the general populace.
When SEEDS begins working with a society it encourages a
savings culture by promoting the benefits of small, but regular
deposits to establish a rural capital base.
SEEDS has partnered with the State, the banking
sector and other financial institutions in financing the rural
sector. SEEDS looks to form constructive partnerships and
alliances with these organizations and projects both national
and international. SEEDS has began a program to develop its
Districts into ‘District Banks’. All districts will also become
Enterprise Development Centres. Their focus is on being
responsive to the needs and requests of the people in the area,
as well as providing innovative linkages and technologies.
To increase the quality of services SEEDS Training Division
provides, it is establishing ‘Centres of Excellence’ at three
regional offices.
MICROFINANCE 73
SEEDS’ beneficiaries have access to a variety of loan
products. Of them loans from society savings fund and loans
from SEEDS funds are two different loan schemes. The first
type of loan is primarily issued for short-term credit needs
and the second type is for medium term investment or other
needs. In addition to SEEDS own revolving loan funds
SEEDS borrows from the National Development Trust Fund
(NDTF), Integrated Rural Development Programs (IRDPs),
ISURU project, other government projects, banks and donors
to finance these loans.
According to some of the research findings recently,
the government Change Agent Program (CAP) has been
effective in reaching some of the poorest8. This is particularly
the case where Community Based Organizations (CBOs)
have received external granter assistance or linked to other
projects or services providers. However, the program seems
to be losing momentum due to the absence of continued donor
funding. The Multi-Purpose Co-operative Society (MPCS)
Co-operative Rural Banks (CRBs) and TCCSs remain key
microfinance service providers throughout most of the
country. These co-operative movements that once dominated
the provision of microfinance services have suffered from
direct competition introduced at national and local level, and
the poor have been socially mobilized within other schemes.
This is as especially so in the case of the TCCSs as different to
the other co-operatives they exist primarily to provide credit
as well as savings.
Multipurpose CRBs have a long tradition in rural areas
and agricultural finance, but their market share has been on
the decline due to poor commercial orientation (World Bank,
2005). The CRB system initiated in 1964 in Kandy District
8 The CAP initiated by the government under the then Ministry of Rural
Development in 1978 is Sri Lanka’s oldest social mobilization program.
74 H.M.W.A. HEARTH
and in the initial years was a partnership between the People’s
Bank and the co-operative movement. The People’s Bank
chose Multi-Purpose Co-operative Societies (MPCS) with
a significant membership and acceptable accounting and
management to set up Co-operative Banks. The intention was
that CRB’s focus on small loans and savings that time was
beyond the reach of the People’s Bank. It was seen as a win-
win equation for the People’s Bank and the MPCS movement.
The initial CRBs were even managed by staff members of
the People’s Bank. All accounting and management/banking
systems were introduced by the People’s Bank and all training
of staff undertaken by them.
The CRBs which were the banking division of the
MPCS were set up as an independent profit centre and given
semi-autonomy from the MPCS but had no separate legal
status. However, People’s Bank (PB) relationship with CRBs
changed a number of times and the practice of having PB staff
as managers soon ended with experienced officers appointed
instead as instructors to each CRB. Further, after the re-
organization in 1971 the autonomy of the CRBs has being
reduced. By year 1997 the relationship between the PB and
CRBs ended, leaving a major vacuum as no longer did CRBs
have access to the banking technology and capacity building
from an external source, and training reduced to in-house
training by senior officials. As a result of the PB moving away
from its advisory and semi-banking role with CRBs the bank
started setting up its own higher level organizations starting
with district unions. By the end of 1999 there were 14 such
district unions providing banking services to the CRBs.
At the end of December, 2000 a staggering Rs. 5.5
billion in savings were maintained by CRBs. The savings
were from both members and non-members with members’
accounting to 2,156,068 and non-member accounting to
MICROFINANCE 75
3,368,683. The total deposits amounted to Rs 14.8 billion of
which Rs 3.92 billion is in savings accounts and Rs. 10.87
billion in fixed deposits. However, out of 311 CRBs, only 174
made profits in 2001 (World Bank, 2005).
Ownership of the CRBs is with the (MPCS) with a few
exceptions and therefore they are not a separate legal body but
a division of the MPCS. MPCS leadership is elected by the
members and is in many cases divided along party political-
lines, open to political capture rather than the effective and
efficient management of the CRBs. The ownership issue is
also a threat to the profitability of the banks with the profits
considered as part of the profits or losses of MPCSs’ as a
whole, where other divisions are making losses then the
incentive for the CRBs to maximize their profits is diminished.
The salary structure for staff is poor and there is no profit
share for the members both of which reduce the incentive
for effective and efficient operation. Indeed, CRBs operate
under the Ministry of Cooperatives and are quasigovernment
institutions. The ministry determines the lending interest rate,
which is not a cost-covering rate. The multipurpose structure
of CRBs makes their consolidation more difficult, while the
absence of an effective apex structure limits their access to
product development and financial market (World Bank, 2005;
SIDA, KFW, and GTZ, 2004).
As multipurpose cooperative society, the first institutional
microcredit agency in Sri Lanka was the TCCSs set up in
1906. However in the beginning the growth of these societies
was slow and by the end of 1913 there were only three
registered societies. The extraordinary growth after 1978 was
due to a change in leadership and a complete re-structuring
of the movement building a three-tier structure with Primary
Societies, District Unions and a National federation. A major
focus on training and education was also commenced and a
76 H.M.W.A. HEARTH
campus set up in Kegalle for this purpose. By the end of 2000
there were 8,435 registered societies with 810,250 members
covering 16.09 percent of Sri Lanka’s population. Of this
there were 54.9 percent women members and 45.1percent
male members. However, it should be noted that growth
of TCCS primary societies has stopped since 1997 and the
statistics also show a large number of societies that are no
longer functioning.9
The SDB was set up in 1997 as a specialized bank
with the primary societies and the district unions having the
majority shareholding. The SDB provides loans direct to
the qualified primary societies and had to operate branches
at the end of 2000. The societies are now categorized into 3
grades based on savings and management criteria with grade
1 societies qualifying for loans from the bank. SANASA has
a training centre which provides training for its own staff and
client organizations staff and volunteers giving training in
social mobilization, capacity building and the management
of financial accounts at society level.
Both local NGOs and INGOs have played the role of
intermediary in various dimensions. NGOs have been active
in starting and participating in micro credit programs. This
includes creating awareness of the importance of microcredit
within the community, as well as various national and
international donor agencies. They have developed resources
and tools for communities and microcredit organizations to
monitor progress and identity good practices. They have
also created opportunities to learn about the principles and
practice of microcredit. This includes publications, workshops
and seminars, and training programs. Activities of INGOs in
North and East region are to a greater extent compared with
other regions in the country.
9 SANASA Statistical Report, 2000.
MICROFINANCE 77
Commercial banking sector in Sri Lanka have been
providing microfinance services since the early 1960s, firstly,
by the state owned commercial banks and secondly by a
small number of private banks as they developed strategies
which expanded into new markets. The government has
traditionally used the two state owned commercial banks as
tools for implementing its various policies on agriculture and
poverty alleviation with subsidized loans, re-financing, and
periodic debt forgiveness being the most notable features.
Policy is largely politically driven and financial tools tend to
be unmanageable and have high transaction costs. As a result
the commercial banks are moving away from microfinance.
However, they are presently still obliged to deliver some
limited ‘general’ microfinance products mainly due to ongoing
government rural credit programs that contain microfinance
components.
The Sri Lankan government is moving away from the
direct implementation of microfinance schemes towards
indirect models of intervention that nationalize and streamline
existing government programs and focus on delivering
microfinance services through professional MFIs. It is
essential that the government ensures the sustainability of
its present microfinance schemes as a matter of urgency
to protect existing levels of supply and act to encourage a
more competitive environment through the elimination of
subsidies and increased ‘commercialization of microfinance
industry’. According to recent studies it is clear that increased
commercialization, regulatory reforms and widespread
capacity building of existing schemes are essential. The
CBSL, Annual Reports of 2004, describe the strategically
intervention as “microfinance delivery system was improved
with the involvement of a large number of lending institutions
in the sector and by linking MFIs with formal banking
institutions. The microfinance schemes were implemented by
the lending domestic private banks using their own funds and
with support of donor funds, during the year, the operation
78 H.M.W.A. HEARTH
of the two microfinance programs implemented by the
CBSL; (SFLCP-ISURU), and (PAMP), covering ten districts,
continued through a network of lending microfinance delivery
institutions” (CBSL, Annual Report, 2004, pp. 134).
RDBs were set-up by the government in 1986, as
it was felt that the two main state-owned banks were not
effectively reaching the remote rural areas or the smallest
customers. The RDBs were under Central Bank management
and financed entirely by the government. A total of 22 banks
were established all districts, excluding the North and East
region. The RDBs were re-structured in 1998 and consolidated
into 6 Regional Banks with microfinance components. The
restructuring involved giving the RDBs more independent
management and a broader ownership base and shareholder
appointed board members, although the Chairman is still
government appointed and open to political capture10.
Since restructuring the bank has become profitable
(although marginally in many cases). In the year 2000, total
loans disbursement was estimated at Rs. 4,043 million. Self-
reported data indicated that total loans outstanding as of
December 31st 2000 was Rs. 5,244 million. The total loan
portfolio of the RDBs grew by Rs. 697 million, an increase
of 21 percent and saving grew by a massive Rs. 1,427
million to Rs. 3,937 million, a growth rate of 40 percent in
one year. Personal guarantees from customers of the bank
or immoveable property are used as collateral for loans with
interest rates varying between 12 percent and 27 percent
dependent on the type of activity and degree of subsidy
(CBSL, 2001).
The restructuring of the RRDBs and the creation of
six separate RDBs has proved to be correct and now with
independent management and with newly competitively
10 The Bank of Ceylon, the Peoples Bank, the National Savings Bank
and Employers Provident Fund all became shareholders in addition to
Central Bank.
MICROFINANCE 79
recruited General Managers, the banks are showing reasonable
profits and dividends. However the restructuring process can
go ahead further and at least fifty percent of the shares sold to
the private sector at the same time bringing in private sector
expertise to the Board11.
Today, commercial banking services continue to
improve and the environment is becoming increasingly
competitive. The number of branches have expanded and
been accompanied by increased density of customers served
per branch. The availability of modern services such as
automated teller machines, credit cards, and telephone, and
internet banking services continues to increase rapidly. This
situation has encouraged financial intermediation and increase
financial deepening in the economy, i.e. reaching lower
income households.
Foreign-owned commercial banks have only very few
branches in the rural areas of the country and have virtually no
focus on microfinance. Of the private domestic banks, Seylan
Bank, Hatton National Bank (HNB) and Sampath Bank also
participate in the government’s New Comprehensive Rural
Credit Scheme (NCRCS) and the Surathura Diriya Credit
Program as the state-owned commercial banks provide
subsidized loans to paddy and other sectors. It appears that
only the Hatton National Bank and Seylan Bank have shown
any significant interest in microfinance outside of government
promoted and subsidized programs.
The Hatton National Bank was the first private commercial
bank in Sri Lanka to offer microfinance products for self-
employment and enterprise development. In 1989 a program
called Gami Pubudu was initiated utilizing the HNB’s own
11 For more details see “National Microfinance Study of Sri Lanka: Survey
of Practices and Policies” Jun 2002, Colombo, Aus AID and GTZ, pp.
113-116.
80 H.M.W.A. HEARTH
funds with small loans being granted using project feasibility
and two guarantors as collateral. Over time, probably due to
the entry of others the bank has shifted its focus from the poor
to rural entrepreneurs who may include people that are in the
middle class. This shift is most likely due to the wider range
of subsidized actors entering microfinance such as Samurdhi.
The Seylan Bank entered microfinance in July 1997
after the Bank’s Chairman developed a personal interest
in poverty alleviation and other social causes. The bank’s
microfinance operations focus on loan size between Rs. 10,000
– 250,000 but estimates that their average loan size is around
Rs. 22,000 with the target market in the agricultural sector
focused on special projects in the more remote rural areas of
the country. As a whole we can conclude that participation
of private commercial banks in the sector is minimal in a
comparative sense.
3.3 Microfinance in Informal Sector
The informal microfinance activities in Sri Lanka can
be identified under four different categories:
 Direct Money Lenders: this category includes
professional money lenders, friends, relatives,
neighbors and registered pawn brokers.
 Indirect Money Lenders: this group includes retail
and stock traders, agriculture product collectors and
suppliers, paddy millers etc.
 Voluntary Credit Groups: this category includes
unregistered single purpose or multipurpose saving
and credit societies, welfare societies, rotating credit
and saving societies (ROSCAS).
MICROFINANCE 81
 Independent Voluntary Movements: these organizations
are providing microfinance as registered companies
or registered national movements. Sarvodaya
Shramadana Movements, Janshakthi Movements are
some examples for these organizations.
Money lenders are in rural informal financial market
operate competitively in the rural sector by providing a
extensive range of financial transactions link or tied to land,
labour, crop harvest and agriculture activities. When the
formal sector is not present money lenders are strong in
the rural market. The formal money transaction and loan
facilities have improved during the last two decades due to
widening and deepening of the banking sector; yet the money
lenders in the informal market dominate the market. Another
reason for them to dominate this sector is the large number
of landless and poverty of farmers, whose income is irregular
and unpredictable and formal sector financial institutions are
unable to accommodate these people. The lack of awareness
of the facilities available in the formal sector, unclear and long
procedures and unfriendly environment of the formal sector
further contributed for the poor has increased the tendency
to use money lenders.
Nearness is one of the reasons as to why the poor
villagers are attracted to money lenders. They don’t want
to spend time and money to travel to bank at a distance
place. Another attraction in the informal sector is the less
cumbersome procedure of quick credit without documents.
These money lenders are available at any time of the day,
which is day of night. In other words, they are accessible
at all times. The innocent rural people like the comfortable
atmosphere with the money lenders. In the informal sector
borrowers have the freedom of deployment and also has
82 H.M.W.A. HEARTH MICROFINANCE 83
flexibility of repayment. Money lenders hardly keep accounts, formal financial sector from 1996 onward there is a 43.1 per
no advertisements or name boards, no documents and cent increase of borrowing from institutional sources. Till
transaction cost is very low compared to the formal sector. 2004 informal sector was very strong on lending, (55.6 per
There are no legal barriers to effect any transaction and they cent) but according to GTZ Microfinance Industry Report of
are very efficient in the financial field. Sri Lanka, 2009, the borrowing from informal sector is 18.3
money lenders. In the informal sector borrowers have the freedom of deployment and also has
Though all the above benefits are available in the per cent to 20.8 per cent. This means currently the activities
flexibility of repayment. Money lenders hardly keep accounts, no advertisements or name
informal money market, they are not free, and rural people of lending of informal sector is less significant.
boards, no documents and transaction cost is very low compared to the formal sector. There are
have to bear a very high cost. The borrowers have to pay a
no legal barriers to effect any transaction and they are very efficient in the financial field.
The indirect money lenders in the informal sector are
relatively very high rate of interest for the credit obtained. traders, agriculture product collectors and suppliers, paddy
Though The unregistered
all the above pawn
benefits are available in thebrokers, money
informal money lenders
market, they are not free, and millers etc. They lend to poor customers such as farmers, on
operating in to
rural people have a bear
similar
a very fashion and
high cost. The friends,
borrowers haveand
to payrelatives may
a relatively very high rate condition to repay after harvest. In some cases they verbally
lend money
of interest withobtained.
for the credit interest or without interest in the informal mortgage the crop with added interest or pre- determined
money market. They lend money sometimes with collaterals prices for crop production.
or
Thesometimes
unregistered pawn without
brokers, collaterals.
money lenders operating in a similar fashion and friends, and The voluntary informal credit groups are most
relatives may lend money with interest or without interest in the informal money market. They
The borrowing of institution and non-institutional unregistered. Some groups are societies for single purpose or
lend money sometimes with collaterals or sometimes without collaterals.
sources in Sri Lanka indicated in Table 2.4 below are based multipurpose savings and credit societies. Some are welfare
on consumer finance and socio economic surveys. societies, death benefit associations, grama sanwardena
The borrowing of institution and non-institutional sources in Sri Lanka indicated in Table 2.4
(village development societies) and Rotating Credit and
below are based on consumer finance and socio economic surveys.
Table 3.1: Borrowings of Institutional and Non- Saving Societies (ROSCAS). The Sarvodaya movement and
institutional Sources in Sri Lanka Janashakthi movement are independent movements operating
Table 3.1: Borrowings of Institutional and Non-institutional Sources in Sri Lanka
in the informal sector in Sri Lanka.
Year Institutional Sources (%) Non-institutional Sources (%)
1963 7.6 92.4 SEEDS has been in existence since 1986. SEEDS was
1973 11.5 88.5 the first centrally managed, specialized microfinance NGO in
1978/79 10.7 89.3 Sri Lanka. From its beginnings operating in 80 societies in 5
1981/82 9.7 90.3 districts it has expanded to a national level project, operating
1986/87 16.6 83.4 in over 2,600 societies, covering more than 5,000 villages,
1996/97 43.1 56.9 in 18 districts, encompassing nearly a half a million people.
2003/04 44.4 55.6 SEEDS provides 10 percent of the total number of micro
Source: Central Bank of Sri Lanka, Annual Report 2010 loans, and has been progressing steadily toward financial self
sufficiency while providing micro loans of only Rs. 8,000.00
The
The Table Table
2.4 shows 3.155.6shows
that still per cent ofthat stillare55.6
borrowings per cent sources.
from non-institutional of In on average (Charitonenko and de Silva, 2002). SEEDS’
borrowings arecent.from
1963 it was 92.4 per Due tonon-institutional sources.
the development and expansion of formalInfinancial
1963sector
it from origins lie in the lessons learned by its parent organization, the
was 92.4 per
1996 onward there cent.
is a 43.1Due to increase
per cent the development
of borrowing fromand expansion
institutional sources.of
Till 2004 Sarvodaya Movement. In the late 1950s, Sarvodaya evolved
informal sector was very strong on lending, (55.6 per cent) but according to GTZ Microfinance
84 H.M.W.A. HEARTH
as a voluntary movement committed to the enlistment of poor
and marginal communities through a philosophy of sharing
a mutual support. As co-operative and sharing activities
proliferated in village communities across the island, selected
councils were formed in order to represent and organize the
voluntarism and concerns of members. These councils grew
into Sarvodaya Shramadana Societies, taking on responsibility
for the well-being of their communities.
For Sri Lanka’s small-scale producers, competitiveness
rests on an ability to respond to changing market conditions,
secure the right opportunities and spread risks. But these
producers may not always have access to the information,
technologies, and financial services to help them meet these
challenges – SEEDS meet their needs. Except SEEDS, only
three other NGOs with an organizational budget of more than
SLR 20 million consider microfinance as their core activity.
They are Janashakthi, Social Mobilization Foundation (SMF)
and Arthachariya Foundation. Even these four agencies,
especially SEEDS and the SMF, conduct a considerable
amount of “credit plus’ activities. SEEDS and Janashakthi
have focused mostly on their own sustainability, and as a
result have captured almost one quarter of the microcredit
market (CBSL, 2000, p. 215).
Sarvodaya has overwhelmingly demonstrated that
when people organize themselves at the grass root level,
with a collective leadership, they can utilize their resources
to enhance their quality of life. From ‘the bottom up through
community based programs’, they are able to satisfy their
basic human needs such as a clean and beautiful environment,
a safe and adequate supply of food and water, modest
housing, adequate clothing, basic health care, education,
communication and energy requirements. The provision of
social capital to people based organizations like Sarvaodaya
MICROFINANCE 85
can ensure cost effective outcomes that cater to the needs
of the marginalized entities. SEEDS’ goal is to facilitate
the eradication of poverty, by promoting the economic
empowerment of rural people and working with them towards
creating sustainable livelihoods. SEEDS enable members to
pursue their income earning activities more successfully. This
is done primarily in two ways. Firstly, through providing
credit to the members at fair rates of interest. SEEDS provide
loans in the range of SLR 10,000.00 – 50,000.00 with a very
few loans which amounts close to SLR 500,000.00. Secondly,
through providing training, information, advice and product
marketing support towards improving their business and
technical skills – credit-plus services. As at the end of 2000,
SEEDS’ massive credit-plus operations, 55,698 people have
received training in social mobilization, credit management,
accounting, entrepreneurship, and a range of technical subjects
(Charitonenko and de Silva, 2002).
The ‘Janashakthi’ banking societies were established
in 1980s under the Women Development federation in
Hambantota District and later in Galewela in Matale District.
The objectives of the scheme was to empower rural women
in the area by providing credit and other related services,
including savings and banking practices, developing sanitation
and nourishment practices and training them for skill
development. The target group of the scheme was women
in poor families whose monthly income was less than Rs.
1,500. In 2001 there were 67 Janashakthi societies with 28,168
members in the Hambantota District. In Galewela only few
societies are in operation.
There is a similar informal society at Puttalam district,
“Wilopotha Kantha Ithurum Parishramaya’’ doing impressive
microfinance activities. In addition to the above mentioned
MFIs there are few such organization operating in various
86 H.M.W.A. HEARTH
parts of the island without much publicity. For example in
the Matale district Naula Kantha Maha Sangamaya, Laggala
Kantha Sangamaya, can be mentioned. In each district there
are unregistered such societies operating in the microfinance
sector with millions of transactions. Most of them are not
registered due to their fear of Income Tax Regulations and
other transaction costs.
3.4 Studies on Microfinance in Sri Lanka
In the Sri Lankan context, in spite of the long history
and the large number of institutions providing microfinance
services particularly to the poorest households, there are
only a limited number of acceptable research findings on the
ways of approaching of clients and impact on poverty and
vulnerability reduction. Hewavitharana (1994); Dias (2001);
and Mithrarathna (2003) have reviewed the progress of the
Women’s Development Federation (WDF), also known
as Janashakthi Banks, in Hambantota. In a more rigorous
analysis, Wickrama (1998) evaluates the Social Mobilization
Program in the Hambamtota district by using quantitative
and qualitative data collected through a sample survey. As
a whole, all these survey findings confirmed that client’s
socio-economic condition has improved with the intervention
of microfinance.
Colombage (2004) assessed the socio-economic
impact of microfinance on the clients’ living condition
and their small enterprises in Sri Lanka. He found that
even though, microfinance has several positive impacts on
client’s livelihood development, variables such as lack of
entrepreneurial skills, small size of loans, investing in low
value added activities, limited product diversification, and
poor physical infrastructure adversely affect the clients’ socio-
economic development. Thilakarathne, Wickramasinghe
and Kumara (2005) have conducted a household survey on
MICROFINANCE 87
microfinance outreach and its impact on poverty covering
all districts except those in Northern and Eastern areas. She
concluded that microfinance has helped households in middle
quintiles to increase their income and assets; helped the very
poor to increase consumption expenditure; has worked as
an instrument of consumption smoothing among almost all
income groups; and has helped women to increase their social
status and improve the economic condition. Further, this study
recognized that to create a sustainable micro-enterprise and
other economic activities, it is important that MFIs facilitate
directly by involving in providing credit plus services to their
clients, particularly those in low income categories.
In a more recent study, The Ministry of Finance and
Planning- Sri Lanka and GTZ (2008) have conducted a
household survey on outreach of financial services in Sri
Lanka, and concluded that despite financial institutions having
a rather extensive coverage, there is still a large unmet demand
for credit. Further, this study revealed that poorer income
groups are less able to derive the benefits of utilizing financial
services than richer income groups. Another recent study,
Colombage, Ahmad and Chandrabose (2008) have conducted
a random household sample survey in selected districts in
Sri Lanka on the effectiveness of microfinance in reducing
rural poverty. Even though, microfinance intervention has a
positive impact on client’s socio-economic development at
various levels such as at family level, at business level, at
community level and at individual level, the finding of the
study casts doubts on the popular belief that microfinance
fosters small enterprises, and thereby uplifts the standard of
living of the poor.
de Mel, McKenzie and Woodruff (2008) have found
that returns to capital were zero among female-owned
microenterprises but in excess of nine per cent per month for
88 H.M.W.A. HEARTH
male-owned enterprises. They also found that higher returns
for males show that, on average, male-owned enterprises are
more likely to generate the return on investment necessary
to repay microloans. Their findings have serious implications
for conventional microfinance practice and policy which
concentrate on lending to women.
Premaratne (2009) investigated the accessibility and
affordability of rural microfinance services in Sri Lanka
describing the constraints and opportunities in MFIs in rural
economy. Gunathilake and de Silva (2010) have investigated
the impact of access to finance, through control over the
loan assisted project, on women’s empowerment. The study
develops a project control index and an empowerment index
based on several components appropriate for the Sri Lankan
context. This empirical investigation finds that ownership of a
microfinance loan increases a woman’s control over the loan-
assisted project, and through that, has a significant and positive
impact on her level of empowerment. In particular, greater
control over the loan assisted project is found to increase her
contribution in key family decisions.
Most of these currently available analyses are basically
limited in analyzing the impact of microfinance intervention
on poverty of the clients but not the other aspects such
as approaches of microfinance, institutional strategies
and impact of microfinance on poverty and vulnerability
reduction. This present study is an attempt to fill this lacuna
by studying the minimalist and credit-plus approaches of
microfinance, institutional strategies, impact on clients’
socioeconomic development considering income-poverty
and socioeconomic vulnerability, and ability of women
empowerment of microfinance. The study also examines the
impact of credit-plus approach on income empowerment of
households quantitatively. All these analyses are centered to
the two leading MFIs, SEEDS and TCCSs operating in Kandy
District of Sri Lanka as case studies.
MICROFINANCE 89
CHAPTER FOUR
Theory and Concepts in Microfinance
4.1 Approaches of Microfinance
Over the past two decades, MFIs have adopted
innovative techniques of providing microfinance services
to the poor, especially in LDCs. Two main approaches on
the role of microfinance intermediation in poverty reduction
can be identified (Remenyi, 2002). In terms of the first
approach that is portrayed as the Minimalist Approach the
MFIs offer only financial services in the form of credit. These
MFIs are unwilling to provide non-financial services due to
multiple reasons ranging from high administrative costs to
high transaction costs. In that sense, the primary focus of
these MFIs is institutional profit and viability. On the other
hand, MFIs that follow Credit-plus Approach provide other
services in addition to financial services. These non-financial
services may include skill development, training, educational
activities, marketing assistance, supply of inputs and business
development services1. According to them, the provision of
credit alone will not guarantee that the receivers of credit
use scarce capital in productive manner so that the recovery
1 Business development services includes technical assistance and services such as
training on business and financial management, accounts/book keeping.
90 H.M.W.A. HEARTH
of loans is not ensured. These services that include mainly
the services that would assist entrepreneurs and the self-
employed in developing their businesses are provided with,
or prior to, the provision of key financial services, namely
credit facilities. It is interesting to note that these services are
increasingly being recognized as an important component of
microfinance intermediation as they are associated with the
viability and sustainability of the enterprise. Moreover, it is
believed that the viability and sustainability of enterprises
will in turn ensure financial viability and sustainability of
the relevant MFIs. Even though this is not a direct financial
service, it is part of the financial package offered by a financial
institution and should be kept in mind when outreach of
financial intermediation is studied.
4.2 Aspects of Outreach
The economic and social worth of a microfinance
intermediation in terms of the depth, worth to users, cost to
users, breadth, length, and scope of its output described in
this section. Judgments of the performance of MFIs have
been based on the concepts of accessibility/outreach and
financial viability (Yaron, 1994). Accessibility is the social
value of the output of a MFI in terms of the depth, worth to
users, cost to users, breadth, length, and scope (Schreiner,
1998). Accessibility/outreach is commonly proxied by sex or
poverty of borrowers, size of the loan, the price and transaction
costs borne by users, the number of users, the financial and
organizational strength of the lender, and the number of
products offered, including deposits.
Thus, outreach stands for the social value of loans from
a MFI. Sustainability helps to maximize expected social value
less social cost discounted through time, including the net
MICROFINANCE 91
gain of users from loans and deposits, the profits or losses
of the MFI, and the social opportunity cost of the resources
used. Sustainability affects outreach since permanency tends
to lead to structures of incentives and constraints that prompt
all the groups of stakeholders in a lender to act in ways that
increase the difference between social value and social costs.
4.2.1 Depth of Outreach
Depth of outreach is the value that society attaches to
the net gain from the use of microcredit by a given borrower.
Since society places more weight on the poor than on the
rich, the incidence of poverty is a good proxy for depth
(Schreiner, 2002). Deeper outreach usually increases not
only social value but also social cost. As income and wealth
decrease, it costs more for a lender to judge the risk of a
loan. This happens since, compared with the rich, the poor
are more heterogeneous and less able to signal their ability
and willingness to repay (Conning, 1999). Deeper outreach
increases only social value and not social cost when a lender
finds better ways to judge risk at a cost less than the savings
from the better judgment. Such progress increases access, the
ability and willingness to borrow to repay and the lending
technology-supply based on an efficient way to judge credit
worthiness.
4.2.2 Worth to users and Cost to users
Worth of outreach to users is how much a borrower is
willing to pay for a loan. Worth depends on the loan contract
(amount) and on the tastes (willingness to accept), constraints,
and opportunities of the user. With the cost to the user
constant, more worth means more net gain. Cost of outreach
to users is the cost of a loan to borrower. This is separate from
the cost of a loan to society or from the cost of a loan to a
lender. Cost to users includes both price and transaction costs.
92 H.M.W.A. HEARTH
Price includes interest and fees. Prices paid by the user are
revenues for the lender. Transaction costs are non price cost.
They include both non-cash opportunity cost – such as the
value of the time to get and to repay a loan – and loan related
cash expenses such as transport, documents, foods, and taxes.
Transaction costs borne by the user are not revenues for the
lender (Schreiner, 1998).
The three aspects of depth, worth to users, and cost
to users are tightly linked but still distinct. Net gain is the
difference between worth to a user and cost to a user. It is the
highest cost that the borrower would agree to bear to get the
loan, less the cost that the borrower does in fact bear. In turn,
depth of outreach reflects the social value attached to the net
gain of a specific person.
Costs to users can be measured as the present value of
the cash flows and transaction costs associated with a loan.
Worth to users is more difficult to measure. Still, the relative
worth of two or more loan contracts can be compared through
their costs. If a borrower has alternative sources of loans, then
net gain can be measured as the cost savings of a switch to a
microfinance lender.
4.2.3 Breadth, Length and Scope of Outreach
Breadth of outreach is the number of users. Breadth
matters since the poor are many but the aid dollars are few.
Length of outreach is the time frame in which a microfinance
organization produces loans. Length matters since society
cares about the welfare of the poor both now and in the future.
Without length of the outreach, a MFI may improve social
welfare in the short-run but break its ability to do so in the
long run (Schreiner, 1998).
MICROFINANCE 93
In theory, a continuous source of support can allow
a MFI to achieve length of outreach without sustainability.
In principle, such an institution could live a long time. In
practice, however, longer outreach through sustainability
usually strengthens the structures of incentives that serve to
maximize expected social value less social cost discounted
through time. Scope of outreach is the number of types of
financial contracts offered by a MFI. In practice, the MFIs
with the best outreach produce both small loans and small
deposits. Deposits matter for two reasons. First, all poor
people are deposit worthy and save to smooth consumption,
to finance investment, and to buffer risk. In contrast, not all
poor people are creditworthy. Second, deposit strengthens the
incentives for sustainability and length of outreach. Depositors
avoid MFIs if they do not expect them to live to return their
deposits. To attract and to keep deposits, a MFI must please
not donors and government but rather users and regulators.
According to this theoretical framework, it is clear
that even if society cares only for the poor people, however,
that social welfare depends on more than just depth. Breadth
affects the number of the poorest served, and cost and worth
to users affect the net gain. The poorest can use not only now
but also in the future. These six aspects of outreach are used
in this study to compare and contrast the MFIs sampled.
Consequently, descriptive and qualitative analyses were
done with respect to TCCSs and SEEDS, and minimalist and
credit-plus approaches.
94 H.M.W.A. HEARTH MICROFINANCE 95
4.3 Poverty, Microfinance and Economic Well-being Figure 4.1: Causes and Effects of Poverty and Vulnerability
This section describes the theoretical and conceptual in Rural Economy
basis for income-poverty, income-vulnerability2 and
income empowerment models which were used in the study.
This modeling process was totally composed by data and Deprivation, Lack of Lack of Low income,
Lack of freedom*, demand, Savings &
information collected through households’ survey and focus entitlements, Frustration, Low investments,
and Unrest, productivity, Lack of
group discussions with microfinance clients. The causes opportunities pressure and Low quality working Effects
products,
of poverty and vulnerability of rural entities and effects on ,
Informal
conflicts
Malnutrition
capital,
Unemployment
cyclical relationship between factors are described in Figure transactions

3.1. It explains the cyclical relationship between poverty,

economic and social vulnerability of households, lack of
economic freedom, lack of accessibility of markets and Poverty and Vulnerability
Focal
of Rural Households
knowledge, and limitation of capital formation. problem

In a widespread/severe poverty environment, poor strata

of society do not have political, social and economic freedom,
economic opportunities and economic facilities (Sen, 1999).
There is no dynamic internal mechanism in this system to take Inequality, Myopic Lack of Lack of
Lack of behavior, working
them to real development path. They are always living as a choices and Backwardness, capital,
institutional
facilities,
vulnerable group in the society but politicians use them when opportunities, Lack of investment, incentives by the
Causes
Lack of information, and system, and social
they need votes for the elections. Their economic, social and markets, Deprivation production network, Informal
Low growth innovations
political capabilities do not come up under this mechanism. transactions

Consequently, capabilities are underutilized by the poor in

this unfavorable system as shown in Figure 4.1.

Source: Sen (1999); Todaro and Smith (2003); and modified by researcher

* Freedom – political freedoms (in the form of free speech and elections) help to promote economic security. Social
Source: Sen (1999); Todaro and Smith (2003); and modified
opportunities (in the form of education and health facilities) facilitate economic participation. Economic facilities (in
by researcher
the form of opportunities for participation in trade and production) can help to generate personal abundance as well
as public resources for social facilities. Freedoms of different kinds can strengthen one another (Sen, 1999). These
instrumental freedoms directly enhance the capabilities of people, but they also supplement one another, and can
further more reinforce one another. These interlinkages are particularly important to seize in considering
development policies.

2 Poor people isolated in community as well as in family, and faced various

risks because of very low income level.
96 H.M.W.A. HEARTH
* Freedom – political freedoms (in the form of free speech and elections)
help to promote economic security. Social opportunities (in the form of
education and health facilities) facilitate economic participation. Economic
facilities (in the form of opportunities for participation in trade and
production) can help to generate personal abundance as well as public
resources for social facilities. Freedoms of different kinds can strengthen
one another (Sen, 1999). These instrumental freedoms directly enhance
the capabilities of people, but they also supplement one another, and can
further more reinforce one another. These interlinkages are particularly
important to seize in considering development policies.
The core concept of poverty is then the lack of choices
and opportunities. This lack of choice is often due to isolation
(geographic, linguistic or social), high risks of losing one’s
few assets (due to natural disasters, sickness, or unplanned
births), and a lack of access to productive resources (skills,
information, land or credit) (UNDP 1996). This may be due
to marginalization and exclusion. Those factors compound to
create a high level of vulnerability for the poor, closing the
loop of a vicious circle in which difficult access to resources
brings low economic productivity, itself calling for low
income which does not allow to break out of dependence and
perpetuates the situation among the next generations.
4.3.1 Defining and Measuring Poverty and Vulnerability
Several diverse approaches to measure poverty are
evident in social science literature. Ruggeri-Laderchi, Saith
and Stewart (2003) states that there are four distinct approaches
to poverty definition and measurement: (a) the monetary
approach (b) the capabilities approach (c) social exclusion
and (d) the participatory approach. Monetary approach falls
under welfarist (or utilitarian) approach (Ravallion, 1994).
The poverty line, in this approach, is minimum cost of the
poverty level of utility at prevailing prices and household
characteristics (Ravallion, 1998). The monetary approach
MICROFINANCE 97
has also been called the income approach (UNDP, 1997,
p. 16). The reason is that this approach typically leads to
measures solely based on the goods and service consumed
by a household, and the household’s size and demographic
composition which is a more narrow term than utility
(Ravallion, 1994). However, this approach has dominated
the poverty discourse, particularly in measuring poverty. In
this present study has been used this approach especially to
analyze income-poverty of microfinance borrowers.
The capability approach was first presented by Sen
(1999). It defines poverty as not being able to do certain things;
lacking capabilities to function or lacking the substantive
freedoms (a person) enjoys leading the kind of life the person
values. A functioning is here an achievement, whereas a
capability is an ability to achieve (Sen, 1987). Functionings
include being well nourished, being sufficiently clothed and
sheltered and avoiding preventable morbidity, being informed
and knowledgeable, being capable of reproduction, enjoying
personal security, and being able to play a part freely and
dynamically in society. The World Development Report
2000/2001 on poverty also accepts this approach as being
a better characterization of the experience of poverty and
increasing our understanding of its causes (World Bank,
2001). However, this approach is very closely related to
basic needs measures. Basic needs approach also focuses
mainly on material deprivation. The basic needs approach
includes access to food, shelter, schooling and health services,
moveable water, and sanitation facilities, employment
opportunities and opportunities for community involvement.
In this study, these concepts and measurements were included
for both income-poverty and income-vulnerability analyze
and women empowerment analysis as well. Most of the
indicators were used to construct the Women Empowerment
Index, regression analysis, and qualitative analysis.
98 H.M.W.A. HEARTH
Social exclusion approach has been elucidating as
happening when a substantial part of the population is
deprived, disenfranchised and disaffected. The European
Union (EU) defines social exclusion as the “process through
which individuals or groups are entirely or partly excluded
from full involvement in the society in which they live”
(Ruggeri-Laderchi et al., 2003). According to Berghman
(1995), social exclusion is a process, which leads to a situation
of relative deprivation, just as impoverishment is a process
that leads to a situation of income poverty or insecurity of
subsistence. This present study tries to understand how and to
what extent social exclusion is decreased by the microfinance
intervention which can be the group loan or individual loans.
Chambers (1994) states that in the participatory
approach, the public themselves participate in assessing their
own poverty and are able to “share, improve, and examine
their knowledge of life and circumstances, to plan and to act”.
Under the participatory assessments, special attention is paid
to process, with the aim of engaging a range of stakeholders,
generating involvement, maximizing local ownership, and
building commitment to change.
With these various distinct approaches to poverty
definition and measurement, it is clear that poverty is a
multidimensional phenomenon3. The idea that poverty is
deprivation that is experienced in several dimensions is
uncontroversial. The evolution with time of these dimensions,
the definition and measurement are being transformed
from purely economic to social indicators, or indicators of
human poverty (social inclusion), and empowerment of the
3 Multidimensional poverty is made up of several factors that constitute
poor people’s experience of deprivation – such as poor health, lack of
education, inadequate living standard, lack of income (as one of several
factors considered), disempowerment, poor quality of work and threat
from violence (UNDP, 2010).
MICROFINANCE 99
powerless and voiceless and vulnerability. It can be absolute
or relative poverty. The relativist approach distinguishes
an individual’s or household’s deprivation (or lack of well-
being) decided by its position relative to others in society. An
absolute approach is based on an irreducible core of absolute
deprivation in our idea of poverty, which interprets reports of
hunger, malnutrition and visible adversity into a judgment of
poverty, without having to determine first the relative picture
(Sen, 1981).
According to the United Nations (1995), at the UN World
Summit on Social development, agreed on the definitions
of absolute and overall poverty. “Poverty has various
manifestations, including lack of income and productive
resources sufficient to ensure sustainable livelihoods; hunger
and malnutrition; ill health; limited or lack of access to
education and other basic services; increased morbidity and
mortality from illness; homelessness and inadequate housing;
unsafe environments; and social discrimination and exclusion.
It is also characterized by a lack of participation in decision-
making and in civil, social and cultural life.”
Meanwhile, the ‘voices of the poor’ recently collected
by the World Bank from 60,000 poor from 60 countries
describe poverty comprehensively as, “poverty is hunger;
poverty is lack of shelter; poverty is being sick and not been
able to see a doctor; poverty is not being able to go to school
and not knowing how to read; poverty is not having a job;
poverty is fear for the future; living one day at a time; poverty
is losing a child or illness brought by unclean water; poverty
is powerlessness; lack of representation and freedom (World
Bank, 2011).
It is thus important to realize that poverty is not the
lack of material property per se. Rather, the lack of material
wealth is one result of poverty, itself defined as a situation
100 H.M.W.A. HEARTH
of exclusion from society and from its social and productive
systems. Chambers (1995) has illustrated the many forms
of deprivation that very poor people identify themselves
as experiencing that are not captured by income-poverty
measures. These include vulnerability to a sudden dramatic
decrease in consumption levels, ill-health, and physical
weaknesses, social inferiority, powerlessness, humiliation
and isolation. Such dimensions of poverty are significant in
their own right and are also essential analytical components
for the understanding of income poverty.
Vulnerability is an aspect of poverty that relates to risks,
shocks, stresses and internal defenselessness (Lock-Desallien,
1996). The poor are vulnerable to external shocks, the poor
are less insured against risks, and as a result fall deeper into
poverty. The World Bank (2002) defines vulnerability as the
expected welfare loss resulting from unexpected events and
lack of insurance against them. Chambers (1995) explains that
vulnerability as having two sides: the external and the internal
sides. The external side is exposure to shocks, stress, and
risk; and the internal side is defenselessness, meaning a lack
of means to cope without damaging loss. Kanbur and Squire
(2001) identify two dimensions of the problem of risk: it keeps
the poor in low-risk, low return activities, and it endangers
what they already have. Studies on rural credit, microfinance
and insurance highlighted that the households that are more
vulnerable to income shocks devote a much smaller proportion
of land to risky high-yielding varieties (Morduch, 1990).
In this present study the concept of vulnerability is used as
considering both external and internal sides. This was mainly
highlighted in the analyses of women empowerment models.
Accordingly, variable such as social inferiority, powerlessness
and isolation in household and society were used to analyze
the vulnerability status of poor.
MICROFINANCE 101
4.3.2 Income-poverty and Deprivation
Poverty is not purely about material conditions. It also
refers to other forms of deprivation such as social inferiority,
powerlessness and isolation. These variables are closely
interlinked with each other as well as with income and
vulnerability. Therefore, in this research they are examined
together in relation to who commonly experience relatively
intense levels of deprivation and discrimination: women
(particularly female-headed households), and the very poor
(households who are living below poverty line when they
receive credit).
The meaning of poverty and deprivation is not merely
of analytical significant; it also has a strategic dimension.
An attentiveness on poverty as ‘income poverty’ is usually
associated with a conceptualization of poverty-reduction as
moving low income groups to from a stable ‘below poverty
line’ situation to a stable ‘above poverty line’ situation (Figure
4.2). This leads to a focus on promotional strategies ‘raising
persistently low incomes’ (Dreze and Sen, 1989) which, in
terms of financial services, emphasize (often exclusively)
the provision of credit for income generation through self-
employment.
By contrast, a broader view of poverty that conceptualizes
income levels as fluctuating and the dampening of dramatic
reductions in income (and other entitlements) as a major
means for poverty reduction, introduces quite diverse strategic
emphases (Figure 4.3). Protectional strategies become
significant; in terms of financial services this fosters a focus
on voluntary savings mechanisms, emergency consumption
loans and relatively low-risk income generation activities that
are unlikely to create indebtedness.
 H.M.W.A. HEARTH
102 4.2: Poverty-reduction as conceptualized by an income-poverty MICROFINANCE 103
Figure approach
Figure 4.2: Poverty-reduction as conceptualized by an strategies, that raise low income people incomes and create
Income4.2: Poverty-reduction as conceptualized by an income-poverty approach
Figure income-poverty approach additional assets, can make the protection of a minimum
Income
standard of living much easier. On the other hand, effective
protectional strategies may permit low income groups to
Poverty undertake investments that they had previously regarded as
Line
being too risky (Hulme and Mosley, 1996).
Poverty
Line Microfinance can significantly transform the economic
Effective intervention status of clients and correlation that exist between health
by MFIs
status and savings access to social amenities and mobility and
Effective intervention
by MFIs capacity building, effectiveness of microfinance improving
living standard and condition of the poor client. They can
Time
improve entrepreneurship and business practices. There are
Source: Hulme and Mosley (1996). Time
implication of household welfare, diet, and food security,
ownership of household assets, housing improvement and
Figure 4.3:andPoverty-reduction
Source: Hulme Mosley (1996). as conceptualized by children’s education. The impacts and benefits of microfinance
Figure 4.3:an
Poverty-reduction as conceptualized
income-poverty and income by an income-poverty and income
vulnerability
vulnerability approach can be summarized as follows:
approach
Figure 4.3: Poverty-reduction as conceptualized by an income-poverty and income  Increase in household income level
Income
vulnerability approach
 Acquire and accumulate more assets than those who
Income
don’t have access to microfinance
 Cross over the poverty and overcoming condition of
poverty
Poverty
Line  Reducing socioeconomic and political vulnerability
Poverty
Effective intervention by MFIs
and risks
Line
 Empowerment of women in socially, economically
Effective intervention by MFIs
and politically
Time  Reduce the isolation and stress of poor
Source: Hulme and Mosley (1996).
Time  Help to extreme poor to find basic needs
Differentiating between promotional and protectional
Source: Hulme and Mosley (1996).  Savings safety provide the poor with cushion against
approaches between
Differentiating does not require that
promotional they are seen
and protectional as unrelated
approaches or that they are
does not require
as competing
seen as unrelateddirectly againstdirectly
or as competing each other.
against Effective
each other. promotional
Effective promotional strategies, shocks and risks
Differentiating between promotional and protectional approaches does not require that they are
seen as unrelated or as competing directly against each other. Effective promotional strategies,
104 H.M.W.A. HEARTH
4.4 Women Empowerment and Social Capital
This section emphasizes the conceptual framework
on formation of social capital and women empowerment
potentiality of microfinance intervention. The concept of
social capital is used in a wide spectrum of social sciences.
Social scientists study social capital in relation to myriad
issues, including economic growth, development, investment
patterns, democracy, governance, performance of public
institutions, economic performance of particular regions,
poverty and many more concerns of social sciences. Some
scholars (Putnam, 1993; Daley-Harris, 2001) have accepted
it as a novel approach in promoting or understanding socio-
economic development of communities, while others (Stiglitz,
2000) have rejected it outright as merely a conceptual tool,
manipulated to shroud vital politico-economic (macro)
factors behind rural development or underdevelopment.
The mere application of the concept developed in various
contexts to address different issues has been a source of
criticism. With the help of these different views on social
capital and its empowerment ability this study formulated
a logistic regression analysis and Women’ Empowerment
Index to quantify women’s empowerment. I also propose to
bring the concept of social capital and the issues of women
empowerment into the analysis qualitatively in this section.
4.4.1 Social Capital and Its Economic Perspective
The idea of social capital was theorized in the 1980s by
two writers of very different theoretical persuasions. The first
was the French cultural theorist Pierre Bourdieu. According
to him ‘social capital’ is certainly not an attribute of ‘society’
as a whole, but it is an aspect to the differentiation of classes.
Social capital, in this view, is really an instrument of power
(Bourdieu, 1980). The second was the American sociologist
Coleman (1988). Coleman (1988) argued that social capital
MICROFINANCE 105
‘inheres in the structure of relations between persons and
among persons’ and that it facilitate an actions of the persons
who are connected by ‘the structure of relations’ (Coleman,
1988). Using a number of examples such as traders in Cairo
market who share information about customers he shows how
the reciprocity and trust which may be an aspect of social
relations are of value because they help to reduce many of
transaction costs, through communication of information
and the kinds of insurance that are related to social networks.
Accordingly, if we understand ‘social capital’ to mean ‘norms
and values of reciprocity and trust’, then we can readily see
why it is valuable, because it should make cooperation easier.
Consequently, it ought to be worthwhile to ‘have more of it’
(Daley-Harris, 2001).
According to Coleman, social capital, like other forms
of capital, is productive, and enables those who have it
to achieve certain ends that would not be attainable in its
absence. For instance, if a certain group is trustworthy and
displays extensive trust in others, they are better placed to
achieve things than a group in which this trustworthiness and
trust is absent. Social capital can therefore be seen to improve
economic performance. Coleman’s central argument is that
social capital is important in the creation of human capital.
But social capital is different from and much less tangible than
physical or human capital because it is not easily replaceable,
or is specific to certain activities. That is, therefore, can
different dimensions of social capital have different outcomes
on different units, such as individual households, groups, or
villagers, and so on?
The findings of the Putnam (1993 and 2002) has
contributed enormously in popularizing the concept of social
capital as it is used today, and he could be credited with
piecing together a coherent story of social capital. He has
106 H.M.W.A. HEARTH
defined social capital as ‘features of social organizations such
as trust, norms and networks that improve the efficiency of
society by facilitating coordinated actions’. He emphasizes
norms and networks of civic engagement and trust. He
builds his theoretical arguments around the theme of civic
community and its relationship to institutional performance.
Putnam sees social capital as both a private and public good,
because it benefits not only those who invest in it but also
those around. Putnam argues that community with high levels
of social capital can reap the benefits of coordinated actions,
which will be more difficult in a community with low levels
of social capital.
Uphoff (2000) has demonstrated that social capital can
be conceptualized in structural or cognitive forms. Structural:
roles, rules, precedents, and procedures. And cognitive:
norms, values, attitudes, beliefs suggesting that the economic
development process will not be successful without these two
categories of social capital and social participation.
The structural category contributes to cooperation,
especially to mutual beneficial collective action of people.
The cognitive concept derived from mental process and
resulting sharing of ideas makes cooperation more likely. The
social networks and their interactions, mutual expectations
of benefits are also important. The meaning of society is an
originally derived version of friendship, personal attachment,
cooperation, solidarity, mutual respect and common interests.
The positive sum aspect (total satisfaction) and welfare
increment mechanism, the unique activities of social
organization with a change agent and acceptance of the
members and the idea of “social capital arises from the human
capacity to think and act generously and cooperatively”.
As stated by Collier (2002), social capital is social
because it involves people behaving socially, and also more
MICROFINANCE 107
importantly because it arises from the non-market interaction
of agents, which nonetheless have an economic effect. From
an economic perspective, social capital is characterized by
three types of externalities, two of which are intrinsic and are
defining features of social capital: firstly, initiation of social
interaction always involves an externality; secondly, social
interaction has an economic effect that is not mediated through
the market; and thirdly, the economic effect is not the primary
purpose of interaction but is incidental or even unintentional.
For instance, group formation for credit purpose, and over
time these relationships assume friendship qualities.
The social collateral effect is illustrated under an
individual lending contract where all the borrowers have
to fear about the default and the penalties that bank would
impose on them. If the group is with a higher degree of social
connectedness it may act as a powerful incentive device to
repay the loan. Microfinance technologies of group lending/
savings and inter-se guarantees of repayment by group
members were found to prevent the need for individual
collateral, and these techniques were found to specially benefit
poor women who faced variety of obstructions in accessing
credit from formal MFIs and in starting up and developing
their businesses.
Many researchers have produced empirical evidence
that supports the theoretically – expected relationship
between horizontal associations of people and economic
benefits. They claim that grassroots associations facilitate
spontaneous cooperation. They point to voluntary credit
associations and group lending programmes as illustrative
of this kind of cooperation. The participation in a rotating
credit device or Self-Help Group (SHGs) is significant in
that a member can earn a reputation for being honest and
reliable by being a successful contributor and avoiding default.
108 H.M.W.A. HEARTH
Hence, SHGs reflects how social capital facilitates collective
actions, and show how pre-existing social connections
mitigate barriers against collective action. Social capital of
this kind is much more important for those who do not have
access to formal credit markets. People who lack physical
capital to offer as collateral effectively pledge their social
connections. Therefore, people’s associations can generate
concrete monetary and economic benefits (Jayamaha, 1990;
Dissanayake, 1991). SHGs credit device are common in the
villages that are the subjects of this present study, and the
study analyzes them as potential sources of social capital and
economic capital for households’ empowerment.
As mentioned earlier, the nature and the extent
of relationships matter for individual lives, but they are
particularly important for the poor, who typically have few
material assets, modest income and education (Woolcock,
2002). Resources that people can draw form social networks
can reduce the vulnerability of the poor. Especially in poor
societies that do not enjoy the protection of an effective social
security system, social networks are crucially important
(Hulme and Shepherd, 2003). In Collier’s (2002) opinion, the
opportunity cost of social interaction may be lower for the
poor. Hence the poor rely on social capital to a greater extent
than the non-poor. But the distributional effects of social
capital are likely to be mixed, as some forms of social capital
may assist the poor but some other forms can limit their access
to resources and information. Social interaction facilitates
copying knowledge from those more knowledgeable, but the
pooling of knowledge among a particular set of people can
exclude the poor from knowledge.
Stiglitz (2000) argues that the relationship between the
density of social capital and the level of development takes
the form of an inverted ‘U’ shape. At the initial stages of the
MICROFINANCE 109
development of a market economy, when the market is not fully
developed, a thick network of interpersonal relations helps
in resolving problems relating to allocation and distribution,
as well as in dispute resolution and enforcement. When
the markets develop, functions performed by interpersonal
relations are taken over by legal systems. This weakens the
value of interpersonal relations and social capital. While it is
possible that the market economy can take over some of the
functions of social capital, even in modern economies it can
be argued that social capital is not made entirely redundant.
Accordingly, they agree that social capital is important for
poor at least at their initial stage of economic growth. But
social capital alone cannot predict economic success, but
rather that it can help people cope and survive economically
in the midst of socio-economic and political adversity. Hence,
they argue that it is necessary to promote holistic social
interventions aimed at increasing social capital and promoting
economic growth.
This study attempts to investigate the relationship
between social capital formation through microfinance
intervention and its economic and non-economic outcomes
on households. It is evident that many studies have elicited
empirical evidence to support such a relationship. However,
some studies highlight the potentially negative effects of social
capital formation though microfinance intervention as well.
4.4.2 Women’s Empowerment
‘Empowerment’ basically means a process through
which people acquire more influence over factors that shape
their lives. Microfinance is regarded as one such policy that
seeks to empower women and reduce income and consumption
poverty, and socio-economic vulnerability. The concerns for
gender equity and women’s rights are now an integral part of
pro-poor development planning. The “gender and poverty”
110 H.M.W.A. HEARTH
debate has focused on a number of issues, within which
women are seen to be disproportionately poor be­cause they
lack access to resources. Gender inequalities are particu­larly
visible in resource-based entitlements (land titles, property
rights, credit, etc). Hence the rationale that access to credit
will gen­erate income and livelihood options, gives women
more bargaining power within the household and contribute
to family wellbeing (Sharma, 2011).
Extensive empirical evidence confirms that women’s
access to microfinance has succeeded in increasing
consumption and assets of poor households (Kabeer, 1998;
Pitt and Khandker, 1998). In a recent study Gunathilake and
de Silva (2010) in Sri Lanka, confirmed that ownership of
a microfinance loan increases a women’s control over the
loan-assisted project, and through that, has a significant and
positive impact on her level of empowerment. In particular,
greater control over the project is found to increase her
economic power and her involvement in major family
decisions. However, de Mel, McKenzie and Woodruff
(2008) found that returns to capital were zero among female-
owned microenterprises but in excess of nine per cent per
month for male-owned enterprises. However, returns to
capital may be zero in financial terms but social and other
related gains from the enterprise are positive. Therefore, if
added women participation/empowerment and give them
imputed value, result may be different. These findings have
serious implications for traditional microfinance practice
and policy which concentrate on lending to women. So that
impact of microfinance on women empowerment has mixed
results. Based on these mixed and complex scenarios, this
present study attempted to analyze empowerment ability
of microfinance, using both quantitative and qualitative
measures.
MICROFINANCE 111
The empowerment concept tends to be primarily applied
to disadvantaged groups of people, and is usually linked to
a vision of more equal living conditions in society. Mishra
and Dale (1996) specify a set of variables and elements at
four levels, of particular importance in these communities,
for analysis of gender. The variables are: Access to resources
(economic resources: different categories of land; political
resources: political representation; cultural resources: formal
and indigenous knowledge: role in rituals). Ownership of
resources (land: of different categories; livestock; house).
Control over resources (land: different categories; livestock;
house: by decision about building and repair; income; its
use). Access to alternative opportunities (outside support:
from NGOs and the Government; outside wage employment;
product markets). Social decision-making power (regarding
health care; in marriage: choice of partner, sexual freedom/
bondedness; opportunity for divorce).
Meanwhile, Elliot (2008) suggests three closely related
dimensions of empowerment – individual capabilities such
as health, education, knowledge, self-confidence, vision,
etc; institutional, cultural and other resources that provide
opportunities and constraints; and agency or processes through
which choices are made and put into effect. Thus, it is clear
that the concept of empowerment is being used increasingly
as a tool for understanding what is needed to change the
situation for women and other marginalized sections of
society. The proponents of microfinance consider economic
empowerment as an entry point and a road map towards
overall empowerment. It is believed that non-economic
benefits flow automatically as a consequence of this approach.
Giving women access to credit, it has been argued, is a means
by which both their economic standing within the household
and social position within society can be improved. This
112 H.M.W.A. HEARTH MICROFINANCE 113
argument has been particularly significant in developing to WEI, regression models were estimated with four criteria/
countries where women’s position is so poor. determinants to analyze the poverty and vulnerability
Hulme and Mosley (1996) demonstrate that two forces impact of microfinance services on women. Determinants of
have been particularly significant in increasing women’s empowerment by microfinance services are access, creation
involvement in credit programs. The first relates to the and control over private resources (credit, savings and
financial viability of institutions. In many contexts it is assets), freedom of decision making at home, self-confidence
revealed that female borrowers have proved more reliable on socioeconomic activities, and status in community and
than men borrowers: consequently, some lenders have family (relationships, participation in village societies, social
found that their financial performance can be improved by mobility).
focusing on female borrowers. The second force stems from
aid donors who ‘discovered’ women in the early 1980s and
have subsequently encouraged recipient agencies to provide
women with more assistance. Hossain, Bose and Ahamad
(2004) articulated the female participation in decision making
in their day to day activities. Following this study Colombage,
Ahmad and Chandrabose (2008) constructed a Women’
Empowerment Index to examine the female participation
in decision making as the proxy for agricultural and non-
agricultural activities. They assumed that women’s power
in decision making in three domains, namely agricultural
activities, domestic affairs, and business activities.
With some modifications of above concepts, methods or/
and techniques a WEI was constructed to analyze the impact
of microfinance on women empowerment. Accordingly,
it is assumed that women’s power in decision making is
in four domains, namely agricultural activities, domestic
affairs, business activities, and social affairs. Accordingly,
this present study explores (a) potentiality of microcredit as
a strategy to reduce the economic vulnerability of women by
generating income and creating livelihood options. And (b) the
institution of self-help groups as a collective process creates
“Social Capital” by providing group identity, solidarity and
spaces for negotiation to alter gender relations. In addition
114 H.M.W.A. HEARTH
CHAPTER FIVE
Microfinance Intermediation Process of TCCSs
and SEEDS
5.1 Background of TCCSs and SEEDS in Kandy
Understanding the operations of TCCSs and SEEDS and
their impact on living standards of households is essential for
the analysis of issues that affect the demand for and supply of
microfinance. Therefore, this chapter attempts to evaluate the
nature and patterns of activities, current status, and services
provided by SEEDS and TCCSs in the Kandy District with
reference to minimalist and credit-plus approaches. The
analysis of the current status as presented here is a subjective
one, based on the perceptions of the MFIs interviewed and
the secondary data from relevant institutions.
The Kandy district was selected purposely as a case
to the study as it is one of the districts in Sri Lanka with
a relatively high poverty rate (30.9 percent in 1990, 25
percent in 2002, and 10 percent in 2009/2010). World Health
Organization - Nutrition Country Profile for Sri Lanka (2000)
indicates that around 26 (%) of the people in Sri Lanka are
undernourished. These persons are found mostly in Kandy
(52%), Badulla (46%), Monaragala (42%), Nuwaraeliya (42)
and Matale (40%) districts. For this reason, many poverty
alleviation programs including several microfinance programs
have been implemented in the District, a fact that reflects the
MICROFINANCE 115
importance of microfinance as a strategy in poverty alleviation
in Sri Lanka. Among them the TCCSs and SEEDS provide
their services to the needy people through a systematize
branch network. However, in Kandy district the initiatives
for microfinance projects seeking poverty and vulnerability
reduction outcomes have had mixed results. The impact of
microfinance and credit-plus services on households’ socio-
economic conditions has been often mixed. Therefore, the
study includes a household level (demand side) study on
TCCSs and SEEDS to investigate the influential determinants/
factors for these mixed performances and varied impact on
clients’ income and socio-economic status.
There were 258 TCCS units in Kandy District by June
2002, while there were 160 units of SEEDS. However, the
number of microfinance units has declined over time in the
District. By December 2007, there were 125 active TCCS
units operating in Kandy, while there were108 active SEEDS
units operating in the District. Since there is not much
difference in the number of units between two institutions,
we have selected 25 units from each institution and finally
the total number of units was 50. It was 21.46 per cent out of
total number of microfinance units.
Table 5.1 shows the majority of microfinance units of
these two institutions have followed the credit-plus approach.
Only 24 per cent of MFIs in TCCS have followed the minimalist
approach while 76 percent followed the credit-plus approach.
As with the case of SEEDS, only 16 percent of MFIs have
followed the minimalist approach while 84 percent followed
the credit-plus approach. According to the discussions we have
had with task officers of bank branches, all the microfinance
units of TCCSs and SEEDS followed credit-plus approach
at the initial stage. At least one credit-plus activity was
followed. The reasons for this transformation were scarcity
116 H.M.W.A. HEARTH MICROFINANCE 117
of office personnel, unwillingness of microfinance clients, Average savings and borrowings per MFI units of TCCS
cost minimization and internal management inefficiencies. and SEEDS in Kandy district are given in table 5.1. Average
number of savings accounts per TCCS which is following
Table 5.1: Savings and Loans of MFIs as December 31, 2007 minimalist approach is 267 while it is 812 per TCCS which
MFI Approach of No. of Average No. of Average
MFI No. % Saving value of Loans amount is following credit-plus approach. Average number of savings
A/C savings disbursed accounts per SEEDS which is following minimalist approach
(Rs) (Rs.) is 276 while it is 315 per unit which is following credit-
plus approach. Accordingly, we can see that considerable
TCCSs M 6 24 1603 1,650,009 1171 2,046,657 disparities exist on average saving accounts between the two
CP 19 76 15427 4,063,097 4645 4,759,195
approaches of both MFIs. The main reason for this situation
SEEDS M 4 16 1103 602,172 562 2,541,092 could be the credit-plus services are more attractive and
CP 21 84 6613 1,119,000 2737 1,537,496 encouraging to increase the number of savings. Credit-plus
services are increasingly being recognized as of importance
for sustainability of small enterprises.
M = Minimalist approach
CP = Credit Plus approach As can be seen in Table 5.1, the average amount saved
* Percentages are calculated out of total number of each type and approach by per MFI of TCCS which is follows credit-plus approach
of MFIs is about 2.5 times higher than that of a MFI of TCCS which
followed the minimalist approach. The average value of
5.2 Access to Finance and Financial Inclusion savings per SEEDS which is followed credit-plus approach
Access to finance means to provide an environment is about 1.9 times higher than that of a SEEDS which
in which people have access to the formal financial system, followed the minimalist approach. As mentioned earlier, the
through the use of different financial products at affordable main reason could be the credit-plus services enhanced the
prices. The access could be to any formal financial institution, transactions. However, there can be other internal and external
market, and payment system or to a financial instrument, factors that can affect these differences.
including savings, loans, remittances and insurances services. The average amount borrowed by per TCCS which
Financial inclusion means the process of facilitating those followed credit-plus approach is about 2.33 times higher
sectors and segments of the population that are outside, to than that of a TCCS which followed minimalist approach.
become a part of the formal financial system and enrolling Likewise, average loan amount disbursed per SEEDS which
individuals or groups into the formal financial sector. In followed credit-plus approach is about 0.61 times higher than
this study we were mainly concerned with savings, loans that of a SEEDS which followed minimalist approach. Again
and credit-plus services to discuss these concepts because we can see that there is a considerable variation on borrowings
remittances and insurance are not met as considerable between the minimalists and credit-plus approaches when
components in the MF sector in Kandy District. capturing customers to the credit services of MFIs.
 118 H.M.W.A. HEARTH MICROFINANCE 119
An analysis of outreach by institutional type was group procedure. On the other hand, 81 percent of units in
extended to the individual loans and group loans to determine SEEDS which is following the credit-plus approach provided
whether there is any variation in the type of loan accessed by credit based on individual type. Only 19 percent provided as
customers according to the organizational type. As shown in group loans.
Table 5.2, most of the loans granted by TCCS were individual. According to the discussions held with key informants
An83analysis
percent of TCCS
of outreach which type
by institutional is following
was extendedthe minimalist
to the individual loans and group regarding types of loans provided by TCCSs and SEEDS, it
approach
loans granted
to determine only
whether individual
there loans.
is any variation There
in the is loan
type of no TCCS
accessed by customers is noted that they prefer to provide individual loans because
unit which provides loans as only group loans in the area.
according to the organizational type. As shown in Table 5.2, most of the loans granted by TCCS group formation and collateral under the group system is
However, there are 17 percent of loans provided by TCCS
were individual. 83 percent of TCCS which is following the minimalist approach granted only difficult to arrange. Even though borrowers have the rights to
on both individual and group basis. In the case of credit-
individual loans. There is no TCCS unit which provides loans as only group loans in the area. formation and management of group/s, past experiences reveal
plus MFIs in TCCS, loan provided on individual basis is 84 that effectiveness on livelihood development was marginal
However, there are 17 percent of loans provided by TCCS on both individual and group basis. In
percent. In contrast, the microfinance units of TCCS, do not under the group lending. Officials prefer personal guarantees
the case of credit-plus MFIs in TCCS, loan provided on individual basis is 84 percent. In
provided any loan on ‘only group loan’ basis. than the group guarantee because it is reliable and stable. This
contrast, the microfinance units of TCCS, do not provided any loan on ‘only group loan’ basis.
Table could be the key reason for their priority given to individual
Table 5.2:5.2:
TypeType ofDisbursed
of Loan Loan Disbursed
loans. TCCSs in particular, clients take loans on individual
Name and type of MFI Type of loan
Individual Group Both Indi.& Group
basis, but they belong to a group of borrowers. Within the
No. % No % No. % group they need to find two persons as personal guarantors. As
a whole, they have a village society called SANASA samithi
TCCSs M 5 83 0 0 1 17
CP 16 84 0 0 3 16
including 50 – 80 members in each.

SEEDS M 2 50 1 25 1 25 5.3 Recovery Status

CP 17 81 2 19 2 6
Total 50 40 3 7
It is interesting to note that average loan recovery
M = minimalist approach rate in TCCSs is 90 percent. In the case of TCCSs which is
CP = credit-plus approach
*M = minimalist
Percentages approach
are calculated out of total number of each type and approach of MFIs following the minimalist approach, has 89 percent of average
CP = credit-plus approach recovery rate while, credit-plus institutions reached 91percent
* Percentages
Considerable are calculated
disparities out of total
can be observed number
between of each type
minimalist and approach
and credit-plus microfinance units of average recovery by the end of 2007. It is observed that
of MFIs
in SEEDS with regard to type of loan providing procedures. 50 percent of the SEEDS which is SEEDS as a whole, the average repayment rate is 82.5 percent.
followingConsiderable It is also important to point out that the average recovery rate
disparities
the minimalist approach can based
provided credit be observed
on individualbetween
type. 25 percent provided
asminimalist
between minimalist and credit-plus microfinance units in
and 25
group loans while credit-plus microfinance
percent provided units
based both on in SEEDS
individual with
and group procedure. On the
SEEDS is slightly different (Table 5.3).
regard
other hand,to81type of of
percent loan providing
units procedures.
in SEEDS which 50the
is following percent of the
credit-plus approach provided
SEEDS
credit based which is following
on individual type. Only the minimalist
19 percent providedapproach provided
as group loans.
credit based on individual type. 25 percent provided as group
loans while
According to the25 percent held
discussions provided based
with key both regarding
informants on individual
types ofand
loans provided by
TCCSs and SEEDS, it is noted that they prefer to provide individual loans because group
formation and collateral under the group system is difficult to arrange. Even though borrowers
have the rights to formation and management of group/s, past experiences reveal that
120 H.M.W.A. HEARTH MICROFINANCE 121
Table 5.3: Recovery status of MFIs in TCCSs. While in SEEDS, 12 percent of loans have
been provided using group guarantee and fixed deposits as
Average loan recovery rate MFI collaterals. According to the discussions with officials in both
TCCS (%) SEEDS (%) institutions, group guarantees play an important role among
M 89 79 the lower income groups. According to the secondary sources,
CP 91 86 collateral requirements in SEEDS are diverse with the loan
type. But personal guarantors are always important for any
Both M&CP 90 82.5
type of loan. Conversely, collateral requirements in TCCSs’
The possible reasons for higher repayment rates in both are mostly personal grantees and do not vary with types of
TCCSs and SEEDS would be. (1). Small loan amount, and loans. The reason is that TCCS units followed Community
so the monthly premium and interest amount are small (2). Based ‘Sanasa Samithi’ with larger number of members and
Clients’ achievements are favourable in a short term, and (3). used personal guarantees.
Group guarantee system and flexibility in terms of conditions
and simple loan procedure are also important reasons that
have been identified. Furthermore, many key officials of MFIs Table 5.4: Type of Collateral
state that better repayments behaviour of borrowers will be
an incentive for the next or continuation of the loan for the Type of Collateral Number of loans (%)
investment project. If transaction cost and administrative
costs are lower, high rate of repayments can affect to financial TCCS SEEDS
viability and sustainability of institutions. However, the extent M CP Total M CP Total
of loan amount is a matter here because small loans may 0 0 0 0 0 0
have an effect to increase the rate of repayment but does not No Collateral 33.33 21.05 24 25 9.52 12
influence increase of profitability of an institution. Land 0 10.53 8 0 4.76 4
Building/property 0 5.26 4 0 4.76 4
Jewelry
5.4 Collateral Requirement Household Items
0 0 0 0 4.76 0
50.00 52.67 52 50 52.38 52
Collateral in the form of assets is waived in most MFI Personal Guarantee1
0 0 0 25 9.52 12
units as a method of risk alleviation, it being replaced by a Group Guarantee
0 5.26 4 0 4.76 4
system of guarantors and security deposits. But borrowers Past loan record
Fixed deposits 16.67 5.26 8 0 14.29 12
still have to meet several conditions which are harder for Other 0 0 0 0 0 0
poorer members to fulfill. As shown in Table 5.4, the most No response 0 0 0 0 0 0
common forms of collateral used when providing loans by
TCCSs are personal guarantee and land, which have been used 1. There is a controversy among the analysts of microfinance about the
personal and group guarantees as collaterals. Some of them argue that
about 52 percent and 24 percent respectively. In the case of personal and group guarantees are not collaterals but only an agreement
SEEDS, it is about 52 percent and 12 percent respectively. between two parties or among the members. In this research I used these
Furthermore, 8 percent of loans have been provided by using two items as collaterals because most of the literature taken them as
building/property and fixed deposits as collateral (pawning) collaterals in their analyses.
122 H.M.W.A. HEARTH MICROFINANCE 123
5.5 Credit-plus Services ** Health camps, funeral assistance societies, Collective activities
Credit-plus services refer to non-financial services (Shramadana). Percentages are calculated out of those MFIs that have
offered that particular credit plus service. Columns percentages will not
such as vocational training1, marketing assistance2, other
total to a 100% as MFIs may have offered multiple services. Column
business development services, social welfare and consultancy percentages will not total to a 100% as MF units may have provided
services, which are provided with, or prior to, the provision multiple form of credit plus services.
of key financial services namely, credit. Although, it is
believed
5.5 Credit-plusthat credit-plus services are provided by a number
Services
71 percent of SEEDS are providing consultancy services
of financial
Credit-plus institutions
services in Sri Lanka,
refer to non-financial services itsuch
is important
as vocational to assess
training2
, marketing as their main credit-plus service. Other than consultancy
what proportion
assistance3
, other businessof services
development are social
services, provided byconsultancy
welfare and TCCSsservices,and which service, vocational training and welfare service provision
SEEDS
are providedin Kandy.
with, 79provision
prior to, the percent of financial
of key TCCSservicesunitsnamely,
are providing
credit. Although, it is having importance 67 percent and 48 percent respectively.
vocational training
believed that credit-plus as their
services main
are provided by acredit-plus service.
number of financial Other
institutions in Sri Lanka, The data indicates that both institutions pay their attention
important
it is important toservices
assess whatprovided
proportion ofby TCCSs
services are by
are provided consultancy
TCCSs and SEEDS in as a service provider on marketing assistance as a credit-
services for the
Kandy. 79 percent business
of TCCS units aredevelopment
providing vocational and other
training business
as their main credit-plus plus service. According to the officials, it is noticed that
development services.
service. Other important More bythan
services provided TCCSshalf of the TCCCs
are consultancy services for are
the business providing marketing assistance to various products by clients
providing
development and vocational
other businesstraining to their
development customers.
services. Thisof isthedue
More than half TCCCs are is extremely difficult because markets for products depends on
to the SANASA
providing beingto structured
vocational training their customers.with
This isa due
focus onSANASA
to the community being structured various factors such as quality of the product, distance from
development and individual
with a focus on community development andempowerment.
individual empowerment. the field (especially for agriculture products), quantity of the
product, competition with renowned companies, information
Table 5.5: Credit-plus Services of TCCSs and SEEDS
Table 5.5: Credit-plus Services of TCCSs and SEEDS asymmetry etc.
Institution Vocational Marketing Other Social Consultancy
training assistance Business Welfare ** 5.6 Interest Rates
Development
Services* The all important and most controversial issue is that
No. % No. % No. % No. % No. % of interest rates on lending. The poverty alleviation approach
TCCSs 15 79 2 11 7 37 2 11 11 58 to lending for small borrowers was based on the premise
that these borrowers were too poor to obtain credit at market
SEEDS 14 67 0 0 2 10 10 48 15 71
rates. Therefore, the provision of cheap credit, which meant
* Includes technical assistance and services such as training on business and financial management, project
*management,
Includes accounts/
technical bookassistance
keeping. ** and services
Health such as
camps, funeral training
assistance on business
societies, Collective activities
subsidized finance, was the objective of most microfinance
(Shramadana). Percentages are calculated out of those MFIs that have offered that particular credit plus service. lending schemes. While it was mostly governments which
and financial
Columns management,
percentages will not total to a project management,
100% as MFIs accounts/
may have offered bookColumn
multiple services. keeping.
percentages will
not total to a 100% as MF units may have provided multiple form of credit plus services. could provide finances for such subsidized lending, some
1 Also include self employment training – i.e. training on how to start your NGOs too began limited credit operations in villages and
71 percent of SEEDS are providing consultancy services as their main credit-plus service. Other
own business. among poor communities at low interest rates. There were
2than Marketing
consultancy service, vocational training and welfare service provision having importance 67
assistance includes such as helps which receive borrowers many deficiencies in such lending. Repayment rates were low,
percent andnew
about 48 percent
marketsrespectively.
for theirThe data indicates
production. i.e.that both institutions
supper pay their
market buyers forattention
unintended beneficiaries were large, the funds were often not
curd and vegetables, conducting some exhibitions for handicrafts and
as a service provider on marketing assistance as a credit-plus service. According to the officials,
used for the purposes for which they were given. The total
it isgarments.
noticed that providing marketing assistance to various products by clients is extremely

2
Also include self employment training – i.e. training on how to start your own business.
3
Marketing assistance includes such as helps which receive borrowers about new markets for their production. i.e.
supper market buyers for curd and vegetables, conducting some exhibitions for handicrafts and garments.
 On the other hand, it is clear that TCCSs have the right to decide their own interest rates for
various types of lending. TCCSs charge interest rates on a declining balance basis for all loans
which they are providing.

124 H.M.W.A. HEARTH MICROFINANCE 125

Interest rate charges of SEEDS do not have a much difference. But comparatively it is higher
outreach of such credit was not significant. This study shows rates
than therespectively.
TCCSs. For the Compared
general loans allwith TCCSs,
the SEEDS units SEEDS
charge 30 % have morerate.
of interest
that both TCCSs and SEEDS do not use low interest rates for verities ofthe
Similarly, for loan schemes.
instant Forcharging
loans they are instance, loans
36 percent for education
of annual rate. Loans forandthe low
their loans. It was observed that there is a large variation in vehicles are only given by SEEDS. Minimum rate of interest
income and education activities are 24 percent and 15 percent interest rates respectively.

lending rates among the TCCS units. As shown in table 5.6, is charged
Compared with for theSEEDS
TCCSs, education
have moreloans
veritiesby SEEDS.
of loan schemes. For instance, loans for

for the general loans they are charging 13 -30 lending rates. education and vehicles are only given by SEEDS. Minimum rate of interest is charged for the
Table 5.7 shows details of deposits rates for which
For the instant loans it was 24 – 60 annual lending rates. education loans by SEEDS.
information is available. Compared with TCCSs, SEEDS has
One reason for this situation is that the SANASA federation various saving schemes.
Table 5.7 shows details of deposits About seven
rates for which accounts
information introduced
is available. bywith
Compared
is simply a loose network of TCCSs. It has no central SEEDS for their clients. SEEDS has different types of micro
TCCSs, SEEDS has various saving schemes. About seven accounts introduced by SEEDS for
management and does not act as a regulator or supervisor, savings
their clients. are
SEEDSfacilities
has differentfor
typesSarvodaya
of micro savingsSociety
are facilitiesmembers.
for Sarvodaya No
Society
or even as an effective coordinator of the TCCSs’ activities. deposits are collected from the
members. No deposits are collected from the publicpublic
Table 5.6: Annual interest rates on lending (%) Table 5.7: Annual deposit rates (%)
Table 5.7: Annual deposit rates (%)
Institution General Low Education Vehicle Instant
MFI General Compulsory Fixed External Pancha Children Group Insurance
loan income loan loan Loan
family
TCCSs 11 12 16 12 - 12 - -
loan
SEEDS 4–8 5 – 11 18-24 - 9 9 - 11 4-7 4-6
SANASA 13 – 30 16 - - 24 – 60
Note: According to the amount deposited interest rate may differ for fixed deposits. The higher the amount
SEEDS 30 24 15 30 36 N ote: According
deposited torate.
higher the interest the amount deposited interest rate may differ for
fixed deposits. The higher the amount deposited higher the interest rate.

Note: Interest rate for lending may differ according to the different loan Low interest rates have an added disadvantage for the
Low interest rates have an added disadvantage for the mobilization of savings. Since the deposit
schemes. In case of Sanasa it can differ according to the government mobilization
rate has to be lowerof savings.
than Since
the on-lending rate, the
a MFIdeposit rate
which gives has
credit at ato
lowberatelower
would be
priorities with time. than the on-lending rate, a MFI which gives credit at aoflow
offering a low deposit rate too. This would reduce its capacity for the mobilization savings
On the other hand, it is clear that TCCSs have the right rate
from itswould beespecially
community, offering if theadeposit
low ratedeposit rate
is below the too.rate;
inflation This would
in which case the
to decide their own interest rates for various types of lending. reduce its capacity for wthe mobilization of savings from its
TCCSs charge interest rates on a declining balance basis for community, especially if the deposit rate is below the inflation
all loans which they are providing. rate; in which case the saver gets a negative real interest rate.
Interest rate charges of SEEDS do not have a much As shown in Table 5.1, the average value of savings of SEEDS
difference. But comparatively it is higher than the TCCSs. is lower than the TCCSs’.
For the general loans all the SEEDS units charge 30 % of 5. 7 Services on Women Empowerment
interest rate. Similarly, for the instant loans they are charging
36 percent of annual rate. Loans for the low income and In order to assess the services rendered to women, we
education activities are 24 percent and 15 percent interest examined only the type of activities provided for the women
empowerment during the period 2003 – 2007. As a MF service
saver gets a negative real interest rate. As shown in Table 5.1, the average value of savings of
SEEDS is lower than the TCCSs’.
126 H.M.W.A. HEARTH MICROFINANCE 127
provider, 52Women
5. 7 Services on percent of TCCS units have formed a women
Empowerment Keeping accounts and records about the loans provided
society
In order tofor banking
assess transactions.
the services 36 percent
rendered to women, of SEEDS
we examined units
only the type of activities is another method being used. 44 percent of the TCCS and 56
have objectively
provided done the same
for the women empowerment activity
during the for– 2007.
period 2003 transaction withprovider,
As a MF service percent of the SEEDS followed that method as a monitoring
women.
52 percent of TCCS units have formed a women society for banking transactions. 36 percent of method. Sending letters informing the incidence is another
SEEDS units have objectively done the same activity for transaction with women. method used and comparatively it is higher in SEEDS.
Table 5.8: Activity/s for women empowerment
Table 5.8: Activity/s for women empowerment
Keeping accounts and records about the loans provided is another method being used. 44 percent
Meanwhile, a considerable proportion of units of both
of the TCCS and 56 percent of the SEEDS followed that method as a monitoring method.
MFI Consultancy for Formation of Special loan Nutrition TCCS and SEEDS have used ‘letter sending’ as a method
self- women society scheme for programs for Sending letters informing the incidence is another method used and comparatively it is higher in
employments women pregnant
for prevention of defaults. It was 92 percent. As mentioned
Keeping Meanwhile,
SEEDS. accounts anda records about the
considerable loans provided
proportion of unitsisof
another methodand
both TCCS being used. have
SEEDS 44 percent
used
women earlier,
‘letter
discussions
of thesending’
TCCS and as a56
and
percent
method for of
awareness
the SEEDS
prevention
programs
followedIt that
of defaults. was method
areas the
92 percent.
secondearlier,
aAsmonitoring
mentioned method.
No. % No. % No. % No. %
important
discussions
strategy
Sending letters
and informing
used
awarenesstheprograms
by isSEEDS
incidenceare another
(64
method
the second
percent)
used and
important
and TCCSs
comparatively
strategy used by itSEEDS
is higher(64
in
TCCSs 3 12 13 52 8 32 2 8 (48 percent).
SEEDS.and
percent) Meanwhile,
TCCSs (48 a considerable
percent). proportion of units of both TCCS and SEEDS have used
SEEDS 7 28 9 36 6 24 3 12 ‘letter sending’ as a method for prevention of defaults. It was 92 percent. As mentioned earlier,
Percentages are calculated out of total number of each MFIs Table 5.9: Monitoring and record keeping systems
Table 5.9: Monitoring and record keeping systems
discussions and awareness programs are the second important strategy used by SEEDS (64
Percentages are calculated out of total number of each MFIs
percent) and TCCSs (48Inform
MFI percent).
over the Keep accounts Discussions and
Consultancy services for self-employment, special loan scheme for women and nutrition letters records awareness
No. % No. % No. %
Consultancy
programs services
for pregnant women are the otherfor self-employment,
activities launched by the TCCSsspecial
and SEEDS in the Table 5.9: Monitoring and record keeping systems
loan
area. Inscheme
addition tofor
thesewomen and nutrition
services, women programs
can apply loans and they canfor pregnant
deposit money under the TCCSs
MFI
8 12
Inform over the
11 44
Keep accounts
12 48
Discussions and
women areandthe
general rules other inactivities
regulations launched
each institution. The studyby the TCCSs
confirms that SEEDSand and TCCSs SEEDS 9
letters
No.
36
%
records
14
No.
56
%
16
No.
awareness
64
%
SEEDS in the
programs have area.social
a positive In addition to these
impact on women services,
empowerment women
and their dignity.can
This will be Percentages are calculated out of total number of each MFI
Percentages are calculated out12of total 11
number of44each MFI
apply
examinedloans
in detailand
in thethey can under
next chapter deposit money
the demand under the general
side analysis.
TCCSs 8 12 48

rules and regulations in each institution. The study confirms Impose

SEEDS of interest punishments
Impose ofout9
interest
is also
36 another14
punishments
important strategy
is also 56 used16by both institutions
another 64
important
to

that SEEDS
5. 8 Project and TCCSs programs have a positive social
Monitoring
Percentages
limit are defaults.
the loan calculated of could
This total number
be dueof to
each
theMFI
fact that for the profit maximization of MFIs.
strategy used by both institutions to limit the loan defaults.
impact on women empowerment and their dignity. This will This could be punishments
due to the fact that important
for the strategy
profitusedmaximization
be examined
Several in detail
project monitoring in the
methods nextused
have been chapter
by TCCSs under the on
and SEEDS demand
clientele. Among Table
Impose5.10:
of MFIs.
Incentives
of interest and methods of default
is also another prevention by both institutions to
limit the loan defaults. This could be due to the fact that for the profit maximization
Giftsof MFIs.
side analysis.
them, problem discussions and awareness activities for clients are the most popular methods they MFI Inform by
letters
Impose
interest
Court
actions
Discussions
and awareness
have used. Table 5.10 shows that 45 percent of TCCS units and 64 percent of SEEDS units have Table 5.10: Incentives and methods of default prevention
punishment
5. 8 Project
made Monitoring
discussions and awareness programs as a monitoring method.
Table 5.10: Incentives
No. and
% methods
No. of%defaultNo.
prevention
% No. % No. %
MFI Inform by Impose Court Discussions Gifts
Several project monitoring methods have been used TCCSs 23
letters
92 13
interest
52 9
actions
36 12 48
and awareness
3 12
by TCCSs and SEEDS on clientele. Among them, problem SEEDS 23 92
punishment
9 36 8 32 16 64 3 12
No. % No. % No. % No. % No. %
discussions and awareness activities for clients are the most Percentages are calculated out of total number of each MFI

popular methods they have used. Table 5.10 shows that 45 TCCSs 23 92 13 52 9 36 12 48 3 12

percent of TCCS units and 64 percent of SEEDS units have 5.9 Constraints 23
SEEDS and Limitations
92 9 36 8 32 16 64 3 12
made discussions and awareness programs as a monitoring IfPercentages
MFIs arearetocalculated out of total number
play a significant role inofpoverty
each MFIreduction then they must reach large number of

method. Percentages are incalculated

clients. Expansion out of
outreach is vital totaltonumber
in order of eachservices
provide financial MFI for large numbers of
5.9 Constraints
poor people. To and Limitations
reach large numbers MFIs must expand their services. The most successful
If MFIs are to play a significant role in poverty reduction then they must reach large number of
clients. Expansion in outreach is vital in order to provide financial services for large numbers of
128 H.M.W.A. HEARTH MICROFINANCE 129
5.9 Constraints and Limitations 5.10 Summary
If MFIs are to play a significant role in poverty reduction This chapter was focused on the microfinance services
then they must reach large number of clients. Expansion in provided by TCCSs and SEEDS in Kandy district, Sri Lanka.
outreach is vital in order to provide financial services for 80 per cent of the TCCS and SEEDS units have followed
large numbers of poor people. To reach large numbers MFIs the credit-plus approach. The average amount saved by
must expand their services. The most successful examples of microfinance unit of TCCS, which followed credit-plus
large-scale outreach are these that have been accomplished approach is about 2.5 times higher than that of a microfinance
through specialized financial institutions that have operated unit of TCCS which followed minimalist approach. Reason
on the basis of commercialization of microfinance. However, would be the credit-plus services enhanced the clients and
there are several constraints and limitations on MFIs at several their transactions. Types of loans provided by both TCCSs and
stages when they are operating in the field. These constraints SEEDS have noted that they prefer to provide individual loans.
and limitations badly affect their viability and sustainability. 84 percent of loans provided by TCCSs are on individual basis.
Table 5.11: Constraints on implementation, operation, The average loan recovery rate in TCCSs was 90 percent while
it was 83 percent in SEEDS by end of 2007. The key reason
maintenance, and Viability of MFIs
for higher levels of repayments is small loan amount which
MFI Default Lack of Less Myopic Competition Inefficiencies makes the monthly premium and interest payment small. The
Infrastru- deposits behavior from other and
cture of poor FIs corruptions
most common forms of collateral used when providing loans
% facilities % % % % are personal guarantee and land.
%
Vocational training is the main credit-plus service
TCCSs 56 20 12 16 36 12
provided by TCCS units while consultancy services for the
SEEDS 72 8 20 16 44 8 business development are the second. SEEDS are providing
consultancy services as their main credit-plus service while
Percentages are calculated out of total number of each MFI
vocational training and welfare services provision are of
important once. Both institutions do not use low interest rates
on loans while both institutions charge lower deposit rates
Competition from other MFIs, myopic behavior or lack for savings. It was lower than the inflation rate in respective
of knowledge on services provided and project management years (2002 – 2007). Meanwhile, 52 percent of TCCS units
of poor customers, and decreasing tendency of deposits have formed a women society for banking while 36 percent
accumulation are the other constraints they have met. The of SEEDS units have objectively done the same activity for
knowledge of the customers is a very important factor in women. Consultancy for self employment, special loans
starting a feasible investment project and making profit scheme for women and nutrition programs for pregnant
through the time. women are the other activities launched. Problem discussions
and awareness activities are the most popular project
130 H.M.W.A. HEARTH MICROFINANCE 131
monitoring methods used by both institutions. Competition
from other MFIs, myopic behavior of poor customers, and
decreasing tendency of deposits are the other constraints they
have met.

CHAPTER SIX
Impact of Microfinance on Households:
TCCSs and SEEDS

This chapter discusses impact of microfinance on

household income and overall living conditions. Further, it
analyzes the extent to which households have utilized financial
services, and explore the disparities between TCCSs and
SEEDS, gender and income groups with special attention on
minimalist and credit-plus approaches. As mentioned earlier,
family/household is considered as the center of this analysis.
The reason is that small enterprises are closely linked with
the family/household.

6.1 Outreach of Microfinance

Outreach of financial services is analyzed in terms
of breadth and depth of MFI. Breadth of outreach refers to
distribution of MFI services in terms of scale, gender, and age.
Depth of outreach refers to socio-economic status of clients,
with particular reference to distance to closest MFI.

Breadth of Outreach
In short, breadth of outreach is the number of users
of MFIs. Breadth matters since the poor are many but the
financial services available are few.
MFI.

Breadth of Outreach
In short, breadth of outreach is the number of users of MFIs. Breadth matters since the poor are
132
many but the financial services available are few. H.M.W.A. HEARTH MICROFINANCE 133
Table 6.1 HHs distribution of TCCSs and SEEDS with As pointed out in Table 6.2 there are no significant
Table 6.1 – HHsrespect toofapproaches
distribution TCCSs and SEEDS with respect to approaches disparities with regard to household borrowings and savings
Approach No. of HHs – TCCSs No. of HHs – SEEDS across MFIs and male and female clients as well. Percentage
No. % No. % of male borrowers and savers in both TCCSs and SEEDS
Minimalist 12 4.48 12 4.48
is higher than that of female borrowers but not significant.
Credit-plus 92 34.33 152 56.72
Moreover, according to the approaches followed by MFIs,
female borrowers and savers are less than that the male
Total 104 38.81 164 61.19
borrowers. Male borrowers and savers in both institutions are
Percentages are calculated out of the total sample population
Percentages are calculated out of the total sample population slightly higher with minimalist institutions than credit-plus
institutions. However, it is not clear about the cause/s for this
In the MFIs/units covered by the survey, most of the inconsistency.
clients have received credit from credit-plus institutions
Table 6.3: Borrowers/ Savers per household
rather than minimalist institutions (Table 6.1). Available Borrowers / Savers per HH % of HHs
data indicates that the majority of the microfinance units of Borrowers Savers
these two institutions have followed the credit-plus approach.
In the MFIs/units covered by the survey, most of the clients have received credit from credit-plus
1 82 16
Only 4.48 percent of households received credit from TCCSs 2 61
institutions rather than minimalist institutions (Table 6.1). Available data indicates that the
which is following minimalist approach while 34 percent 3 14 18
majority of the microfinance units of these two institutions have followed the credit-plus
received services from TCCSs which are following credit- 3 13
approach. Only 4.48 percent of households received credit from TCCSs which is following 4 & above
plus 1 8
minimalist approachAs
approach. with
while the case
34 percent ofservices
received SEEDS, only 4.48
from TCCSs which percent
are following credit-
received services from SEEDS which is following minimalist
plus approach. As with the case of SEEDS, only 4.48 percent received services from SEEDS Further analysis of the sample aims to determine whether
approach whileminimalist
which is following 57 percent
approachof households
while 57 percent of received services
households received services from households have multiple borrowers and savers. 18 percent of
from SEEDS which is following
SEEDS which is following credit-plus approach. credit-plus approach. households have multiple borrowers while 39 percent have
multiple savers. Moreover, 8 percent of households have 4
Table 6.2: Type of MFI and approach by gender or more savers, reflecting Sri Lanka’s strong saving culture
Table 6.2: Type of MFI and approach by gender
MFI Borrowers (%) Savers (%)
(Table 6.3).
Male Female Male Female Disaggregating data by gender and age groups shows,
TCCSs 53 47 55 45
about 82 percent of the microfinance borrowers covered in the
Minimalist 58 42 58 42
survey are in the age group between 26 and 55 years (Table
Credit-plus 54 46 56 44
6.4). Similarly, 83.6 percent of the female borrowers are in
the age group between 26 and 55 years. Consequently, it is
SEEDS 56 44 54 46
clear that creative and innovative as well as feasible group
Minimalist 67 33 67 33
of people are covered by these two MFIs. This indicates that
Credit-plus 55 45 52 48
most of the credit needy people are belong to young and/or
Percentage are calculated out of the households in the respective MFI and approach
middle ages in the area.
As pointed out in Table 6.2 there are no significant disparities with regard to household
borrowings and savings across MFIs and male and female clients as well. Percentage of male
borrowers and savers in both TCCSs and SEEDS is higher than that of female borrowers but not
134 H.M.W.A. HEARTH MICROFINANCE 135
Table 6.4:
Table 6.4: Percentage
Percentage of by
of clients clients
age andby age and gender
gender or unpaid family workers. This means that such households/
Age (No. of Years) Male Female Total clients managed to develop their livelihood with the help of
Table 6.4: Percentage of clients
< 18 0.3 by age and gender
0.6 0.6 microfinance. It also indicates that unemployed low income
Age (No. of Years)
10-25 6.3Male Female
4.0 6.4Total
earners have the privileged of chance having credit whether
< 18
the amount is small or big.
26-35 23.50.3 0.6
22.5 0.6
22.4
10-25
36-45 31.86.3 34.74.0 6.4
33.2 However, there are around 11 percent of regularly
26-35
46-55 23.5
23.2 22.5
26.4 22.4
26.6 employed workers. Most of them have borrowed money from
36-45
56> 31.8
14.9 34.7
11.8 33.2
10.8
a MFI on behalf of their family members probably to a son
46-55 23.2 26.4 26.6
or a daughter. Also, sometimes they have borrowed money
Total 100.0 100.0 100.0
for an extra investment project. Survey findings discovered
56> 14.9 11.8 10.8
On the other hand,100.0 about 90 percent out of the total that most of the microfinance borrowers have multipurpose
Total 100.0 100.0
sample of this
On the other hand,young
about 90age category
percent oftotal
out of the people
sampleis of
married.
this young When
age category of people employment either on temporary or permanent basis. For
examines education
is married. When examineslevels, around
education 90around
levels, percent of microfinance
90 percent of microfinance clients have instance some times (seasonally) they work as casual workers,
clients
On thehave
educationalother educational
hand, aboutless
qualifications qualifications
90 percent
than GCEout of
(Athe less
total
/ L). than
sample
This GCE
of
implies (Athe/ L).
thisthat
young age
lesscategory
educatedofhave
people sometimes they participate in share cropping in agriculture,
This implies
is married.
benefited fromWhen
MFthat the less
examines
facilities educated
education
(Table 6.5). levels,have benefited
around 90 percentfrom MF
of microfinance clients have sometimes they work as helpers without charging any money.
facilities (Table
educational 6.5). less than GCE (A / L). This implies that the less educated have
qualifications Table 6.6: Employment status of MF clients
Table
Table 6.5:
benefited
6.5: fromHighest
Highest MF educational
facilities
educational (Table 6.5). attainment
attainment of MF clients inof MF clients
MFIs Status Percentage
Male Female Total
Category in MFIs Percentage
Table 6.5: Highest educational attainment of MF
Male clients in MFIs
Female All
Regular 14.9 7.6 10.9
Casual 17.1 11.9 13.8
NoCategory
schooling 2.0 2.6 Percentage 2.4
Male
Contractual 3.2 2.0 2.2
Less than primary 15.5 17.6Female 17.1All
No schooling
Self-employed 52.0 43.2 46.2
Primary passed 30.72.0 30.02.6 30.22.4
Less thanpassed
primary 15.5 17.6 17.1
Unpaid family workers 12.8 33.5 26.9
GCE (O/L) 42.0 42.2 41.9 Total 100.0 100.0 100.0
Primary
GCE (A/L)passed
passed 30.7
9.1 30.0
6.1 30.2
8.2
GCE (O/L) passed
Graduate 42.0
0.7 42.2
1.5 41.9
1.2
Depth of Outreach
GCE (A/L) passed
As mentioned in the theoretical and conceptual section,
Total 100.09.1 6.1
100.0 8.2
100.0
Graduate 0.7 1.5 1.2
depth of outreach is the value that society attaches to the net
gain from the use of microcredit by a given borrower. Since
Total 100.0 100.0 100.0
society places more weight on the poor than on the rich,
Survey results revealed that over 70 percent of the poverty is a good proxy for depth. MFIs provide their service
microfinance clients were not employed in the formal sector to clients living in villages far away from towns. Since we
before the loan (Table 6.6). They were either self-employed have surveyed only TCCSs and SEEDS in Kandy district,
geographical expansion of these two institutions’ has been
136 H.M.W.A. HEARTH MICROFINANCE 137
taken into consideration. Accordingly, 7 percent of the clients of the rural households who have accessed to micro financial
of TCCSs covered in this survey live beyond a distance of services is considerably high (Table 6.8).
more than 4 km. from their residence. About 16 percent of
the clients of TCCSs live beyond a distance of more than 3 Table 6.8: Views on access to MFIs
Respond % of households
km away from residence. In the case of SEEDS, 21 percent
of clients live beyond 3 km away from their living places. Very easy 32
Easy 34
Table 6.7: Distance to closest MFI (percentages) Difficult 17
MFI < 1 km 1- 2 km 2.1-3 km 3.1- 4 km >4
Very difficult 15
No idea 02
TCCSs 31 38 15 9 7
Percentages are calculated out of the total sample population

SEEDS 26 29 24 15 6
The type of institution accessed for financial needs, also
varies across income groups. Table 7.9 shows the TCCSs and
Percentages are calculated out of number of households in each MFI. SEEDS accessed by households of different income groups for
However, the data indicates that most of the clients their credit and savings needs separately. The average income
receive services from theses two institutions without going so after the loan received was Rs. 17,385.00. But before taking
far from their residences. 69 percent of the clients of TCCSs the credit average household’s income was Rs. 10,928.00.
received services without going beyond 2 km. Similarly, 55 Table 6.9 has been made according to household’s income
percent of the clients received services from SEEDS without level before taking credit.
going far beyond 2 km. Thus, microfinance outreach to under
Table 6.9: Financial institutions accessed for loans and
privileged rural areas seems to be at a satisfactory level to
some extent. savings: Income group (percentage)
MFI Loans (1) Savings (2)
6.2. Accessibility of MFIs Q1 Q2 Q3 Q4 Q5 Q1 Q2 Q3 Q4 Q5
TCCSs 34 31 12 15 7 59 51 49 42 40
Sri Lanka’s MF sector consists of a wide range of
SEEDS 55 23 22 12 6 54 41 35 34 23
institutions including commercial banks, development banks,
co-operatives, NGOs, CBOs and Samurdhi banks. However,
in this study TCCSs and SEEDS are considered as pioneer Percentages calculated out of the number of households in the respective
and independent microfinance providers in the field. Results quintile that have: (1) borrowed (Utilization of loans and (2) saved
of the study show that 66 percent of the households have (Utilization of savings). Percentages do not add to 100% vertically as
accessed easily to both institutions and 34 percent of them some households have accessed both MFIs.
have not easily accessed MFIs. This shows that the proportion
138 H.M.W.A. HEARTH MICROFINANCE 139
Over half of the households that have borrowed in the A household in the lowest income group (1st quintile) has
lowest quintiles (1st and 2nd quintiles) have accessed TCCSs borrowed Rs. 21,500.00 on average while the corresponding
and SEEDS for their saving purposes. Further, it is interesting amount for a household in the highest income group (5th
to note that these two MFIs have also been accessed by quintile) is more than sixteen times higher. A somewhat
households by richer groups (4th and 5th quintiles) for the similar pattern can be observed with regard to average savings
savings needs suggesting the need to improve targeting of per household, though the disparity is not as high. However,
these institutions/programs. the number of households which belongs to 4th and 5th quintiles
Table 6.10 shows that average borrowings of households. are very small in the sample.
Objective of this examination is to get a more representative Almost 22 percent of total household borrowings are
picture of borrowing patterns of households. In this section less than Rs.10,000.00, while almost two third are below Rs.
“borrowings” refer to total loan amount taken by sampled 50,000.00. However, the picture varies across institutions.
households from TCCSs and SEEDS at the time of conducting Households with borrowings less than Rs. 10,000.00 are
the survey. “Savings” here refer to the total institutional only 6 percent in SEEDS, while it is 16 percent in TCCSs
savings of households (total savings in these two institutions) (Table 6.11).
at the time
conducting theof conducting
survey. the refer
“Savings” here survey.
to theAccordingly, considerable
total institutional savings of households (total
disparities Table 6.11: Value of borrowings - MFIs
savings in theseexist with regard
two institutions) to households
at the time of conducting theborrowings across
survey. Accordingly, considerable
the income
disparities groups
exist with regard with muchborrowings
to households higher across
amounts in the
the income 5thwith much
groups MFI HH borrowings (Rs.)
quintile.
higher amountsThein average borrowings
the 5th quintile. The average of 5 quintile
th
borrowings are more
of 5th quintile than
are more than 16 times < = 10,000 10,000– 50,000– > 100,000 Total in %
16
that times
of the 1 that
st of the 1 quintile.
quintile.
st
50,000 100,000
TCCSs 16 % 49 % 20 % 15 % 100
Table 6.10: Household borrowings: Income group
Table 6.10: Household borrowings: Income group SEEDS 6% 58 % 24 % 12 % 100
Q1 Q2 Q3 Q4 Q5 Total
Average borrowings 21.5 45.6 54,6 100.3 349.8 145.5 As canAs caninbe
be seen seen
Table 6.12,in Table
there 6.12, there
is institutional is institutional
level variations in formal sector family
(in 1000 Rs.)
Average savings level
savingsvariations in formal
amount per household. sector
55 percent family savings
of households in the SEEDS amount per below Rs.
have savings
(in 1000 Rs.) 18.4 20.6 35.5 42.9 130.6 57.4 household. 55 percent of households in the SEEDS have
10,000.00 while this is around 36 percent for TCCSs. In general, the TCCSs and SEEDS have
Q1 – Q5 indicate that 1st quintile to 5th quintile of the total sampled households.
savings
somewhat below Rs. 10,000.00
similar savings while
patterns though the this
TCCSsisshow
around a much36 higher
percent percentage of
for TCCSs. In general, the TCCSs and SEEDS have somewhatinstitutions
households with family savings above Rs. 100,000.00. Some of the savings in both
Average Average
savings of 5savings
th
quintile of
are 5alsoquintile
th
are also
notably higher notably
than that higherhouseholds.
of 1st quintile similar savings
are compulsory savingspatterns
which should though
be openedthewhenTCCSs show
taking the credit for a
themuch
first time.
than
However,that
savings 1 st quintile
of disparities households.
are relatively low compared toHowever, savings
borrowings. Hence, it is clear that as higher percentage of households with family savings above
disparities
expected there are
is anrelatively low
increasing trend compared
in the to borrowings.
average borrowings and savings Hence,
per household when Rs.
Table100,000.00. Somesavings
6.12: Value of family of the savings in both institutions are
of MFIs
itmoving
is clear that as
from poorer expected
to richer groups. there is an increasing trend in the compulsory
MFI savings which shouldHH beSavings
opened (Rs.)when taking the
average borrowings and savings per household when moving credit for the first < =time.
10,000 10,000– 50,000– > 100,000 Total in %
from poorer
A household tolowest
in the richer groups.
income group (1st quintile) has borrowed Rs. 21,500.00 on average
50,000 100,000

while the corresponding amount for a household in the highest income group (5th quintile) is
TCCSs 36 % 41 % 12 % 11 % 100
more than sixteen times higher. A somewhat similar pattern can be observed with regard to
SEEDS 55 % 29 % 10 % 6% 100
average savings per household, though the disparity is not as high. However, the number of
savings amount per household. 55 percent of households in the SEEDS have savings below Rs.
< =is10,000
10,000.00 while this around 3610,000– 50,000–In general,
percent for TCCSs. > 100,000 Totaland
the TCCSs in %
SEEDS have
50,000
somewhat similar savings patterns though the100,000
TCCSs show a much higher percentage of
TCCSs 16 % 49 % 20 % Some15
households with family savings above Rs. 100,000.00. of%the savings
100in both institutions
SEEDS
are 6 % which should
compulsory savings 58 %be opened24 % taking 12
when the% 100first time.
credit for the
140 H.M.W.A. HEARTH MICROFINANCE 141
Table
Table 6.12:
As can6.12:
be Value
seen Value
inofTable of
family family
savings
6.12, savings
institutionalof
thereof isMFIs MFIs
level variations in formal sector family would be most of the MFIs know in experience, recovery rate
savings amount per household. 55 percent of households
MFI HH Savingsin(Rs.)
the SEEDS have savings below Rs. is considerably high with women clients.
10,000.00 while this <is =around
10,00036 percent
10,000–for TCCSs. In general,
50,000– the TCCSsTotal
> 100,000 and in
SEEDS
% have In addition, as shown in Table 6.14, the average amount
50,000 100,000
somewhat similar savings patterns though the TCCSs show a much higher percentage of of family savings by a male household is about 1.4 times
households with family savings above Rs. 100,000.00. Some of the savings in both institutions
TCCSs 36 % 41 % 12 % 11 % 100
higher than that of a female household in TCCSs, while it
are compulsory savings which should be opened when taking the credit for the first time.
SEEDS 55 % 29 % 10 % 6% 100
is 1.2 times higher than that of SEEDS. However, unlike in
the case of borrowings, differences between male and female
Table 6.12: Value of family savings of MFIs savings show a somewhat mixed picture across institutions.
MFI
Table 6.13 analyses the borrowings and savings of
HH Savings (Rs.) Compared with borrowings the difference between male and
individuals to determine
Table 6.13: Average whether
borrowings by gender the amount of borrowings/
< = 10,000 10,000– 50,000– > 100,000 Total in % female is small on savings.
savings
MFI varies Per
byborrower
gender and whether
Per male
50,000 further differences
Per female
100,000 exist
Male/ female
(Rs.) borrower (Rs.) borrower (Rs.) borrowings
across
TCCSs
MFIs in relation to123,456
102,346
gender. It is29,658interesting to4 note Table
Table 6.14: Average
6.14: Average family
family savings savings
by gender by gender
that
TCCSs
SEEDS
the average 36amount
%
97,547
borrowed
41 %
104,456
by
12 %a male 11
45,672
from
% TCCSs 100 is
2.3 MFI Per saver (Rs.) Per male saver Per female Male/ female
almost 4 times higher than that of a female borrower, while
SEEDS 55 % 29 % 10 % 6 % 100
(Rs.) saver (Rs.) savings
it is 2.3 from SEEDS.
TCCSs 24,348 31,545 22,980 1.4
Table 6.13:
This is the Average
real situation in theborrowings
field of any kind by
Table 6.13: Average borrowings by gender
gender
of credit market and reasons for this situation
depend on several factors. Women still risk averse than men. Some of the marketable SEEDS 21,670 29,321 23,458 1.2
MFI Per borrower Per male Per female Male/ female
investment/projects such(Rs.)
as electrical, mechanical,
borrower (Rs.) etc.borrower
are only (Rs.)
handled borrowings
by males. Information
TCCSs 102,346 123,456 29,658 4 Table 6.15: Purpose of borrowing
6.3 Purpose of Borrowing
SEEDS 97,547 104,456 45,672 2.3 Purpose No. of Loans Value of Loans Average Loan Size
Business/enterprise (%) is the main (%) purpose of borrowing (Rs.)

This is the real situation in the field of any kind of credit by households, both in24terms of value
Agri,livestock, fisheries
Business / enterprise
16 6
40
and number of24,987 loans.
98,854

market These loans

Construction account for
/ housing 15 40 percent 23 of the total value 89,897and
This is theand
real reasons
situation infor
the this
field situation
of any kind depend on several
of credit market factors.
and reasons for this situation Assets / durables*** 18 16 134,893
Women about 24 percent of the 10number of loans 2 taken by households.
depend on still risk averse thanstillmen. Somethanof men.
the Some
marketable Consumption 32,675
several factors. Women risk averse of the marketable
investment/projects such asmechanical,
electrical, mechanical, Business/enterprise
Emergencies*
loans
5
are equally
6
important in
28.564
both
investment/projects such as electrical, etc. are only handled byetc. areInformation
males. Settlement of loans 7 2 31,342

only handled by males. Information asymmetry and weak TCCSs and SEEDS. Another 16 percent of the total loan
Other** 5 5 96,324
100 100
social network for women are some of them. But most of amounts have been taken for some form of livelihood or
the international NGOs, local NGOs and even government income generation activities such as agriculture, livestock
* Includes medicinal, ceremonial and ritual and other emergency purposes
** Includes any other category and also a very small number of loans where a purpose was not stated.

microfinance programs would like to organized women credit and fisheries.

*** Includes purchase Nevertheless, it is interesting to note that loans
of land, gold, machineries.

societies and give credit to women. The one reason would be for agriculture, livestock and fisheries related activities, even
Table 6.16: Purpose of borrowing: MFI
women in developing countries are particularly marginalized though they account for about 16 percent of the total number
Purpose TCCSs % SEEDS %
in socially, culturally, economically as well as in politically; of loans taken by households, are only about 6 percent in terms
Agri., livestock & fisheries 19 8
especially in rural areas and they need helps. The other reason ofBusiness
value/enterprise
(Table 6.15). This 28 is explained by 32 the relatively small
size of loans
Construction taken for these
/ housing 17 activates. 21
Assets / durables*** 9 18
Consumption 4 5
Emergencies* 15 10
Settlement of loans 4 4
Other** 4 2
142 H.M.W.A. HEARTH MICROFINANCE 143
It is interesting to find that loans for consumption, Considerable disparities can be observed across
emergencies and loan resettlement purposes account for institutions with regard to purpose of borrowings (Table
less than 9 percent of borrowings in terms of value while 6.16). In the SEEDS, 32 percent of the loans taken have been
almost 85 percent of the borrowings have been for income
Table 6.14: Average family savings by gender
obtained for business/enterprise purposes. Further, 21 percent
generation or6.14:
Table investment purposes,
Average family savings by i.e.
genderhousing, purchasing of loans have
Considerable been
disparities can taken foracross
be observed construction/housing, while
institutions with regard to purpose 18
of borrowings
MFI Per saver (Rs.) Per male saver Per female Male/ female
assets, agriculture,
MFI livestock, fisheries
Per saver (Rs.) andsaver
Per male business activities.
Per female Male/ female percent of loans
(Table 6.16). In the for purchasing
SEEDS, 32 percent assets or durables.
of the loans taken have Thebeen next
obtained for
(Rs.) saver (Rs.) savings
Construction/housing is also important here because some savings
(Rs.) saver (Rs.) highest amount,
business/enterprise 10 percent
purposes. Further, of21 loans
percent have
of loansbeen havetaken
been fortaken for

of the constructions include buildings for businesses or emergencies. However, borrowings for consumption purposes
construction/housing, while 18 percent of loans for purchasing assets or durables. The next
TCCSs 24,348 31,545 22,980 1.4
overhauls.
SEEDS
But
TCCSs most24,348
21,670
of the
29,321
loans31,545
are 23,458
utilized22,980
for housing
1.2
1.4 are
. much lower in SEEDS.
constructions.
SEEDS 21,670 29,321 23,458 1.2
Table 6.17:
Table 6.17: Purpose
Purpose of borrowing:
of borrowing: Income group Income group
Table 6.15:
Table 6.15:
TablePurpose ofofborrowing
Purpose of borrowing
6.15: Purpose borrowing Q1 Q2 Q3 Q4 Q5
Purpose of No. Value No. Value No. Value No. Value No. Value
Purpose No. of Loans Value of Loans Average Loan Size loan
Purpose (%) No. of Loans
(%) Value of Loans (Rs.) Average Loan Size
of of of of of of of of of of
(%) (%) (Rs.) loans loans loans loans loans loans loans loans loans loans
Agri,livestock, fisheries 16 6 24,987 (%) (%) (%) (%) (%) (%) (%) (%) (% (%)
Agri,livestock, fisheries
Business / enterprise 24 16 40 6 98,854 24,987 Agri., livestock
Construction Business
/ housing/ enterprise 15 24 23 40 89,897 98,854 & fisheries 23 21 17 11 17 9 21 12 15 4
Construction
Assets / durables*** / housing18 15 16 23 134,893 89,897
ConsumptionAssets / durables*** 10 18 2 16 32,675 134,893 Business
Emergencies* Consumption 5 10 6 2 28.564 32,675 /enterprise 23 28 29 41 31 43 28 44 32 38
Settlement ofEmergencies*
loans 7 5 2 6 31,342 28.564
Construction /
Other** Settlement of loans 5 7 5 2 96,324 31,342
Other** 5 5 96,324 housing 15 19 16 17 18 11 15 14 18 25
100 100
100 100 Assets /
* Includes medicinal, ceremonial and ritual and other emergency purposes durables*** 12 13 8 11 7 13 9 14 12 20
* Includes
** Includes any medicinal,
other category ceremonial
and also and ritual
a very small numberandofother
loansemergency purposes
where a purpose was not stated.
** Includes
*** Includes purchase any other
of land, gold, category and also a very small number of loans where a purpose was not stated.
machineries. Consumption 5 4 4 2 3 1 3 2 2 2
*** Includes purchase of land, gold, machineries.
Emergencies* 12 8 20 12 18 17 16 8 11 4
Table 6.16: Purpose of borrowing: MFI
Table 6.16: TablePurpose
6.16: Purpose ofofborrowing:
borrowing: MFI MFI Settlement of
Purpose TCCSs % SEEDS % loans 8 4 4 3 2 2 5 4 3 2
Purpose TCCSs % SEEDS %
Agri., livestock & fisheries 19 8 Other** 2 3 2 3 4 4 3 4 6 5
Agri., livestock & fisheries
Business /enterprise 28 19 32 8 100 100 100 100 100 100 100 100 100 100
ConstructionBusiness
/ housing/enterprise 17 28 21 32
Construction / housing 9
Assets / durables*** 17 18 21 * Includes medicinal, ceremonial and ritual and other emergency purposes
Assets / durables*** 9 18 ** Includes any other category and also a very small number of loans where a purpose was not stated.
Consumption 4 5 *** Includes purchase of land, gold, machineries.
Emergencies* Consumption 15 4 10 5
Q1 – Q5 indicate that 1st quintile to 5th quintile of the total sampled households.
Settlement ofEmergencies*
loans 4 15 4 10
Other** Settlement of loans 4 4 2 4
Other**
100.0
4
100.0
2 In the
Agricultural case of TCCSs,
and business/enterprise 28slightly
loans are percenthigherof loans
among lowerhave
incomebeen
groups while
100.0 100.0
* Includes medicinal, ceremonial and ritual and other emergency purposes
* Includes
** Includes any medicinal,
other category ceremonial
and also and ritual
a very small numberandofother
loansemergency purposes
where a purpose was not stated.
taken forpurchasing
loans for business/enterprise
assets/durables becomepurposes.
a bit moreBut loansastaken
important forincome
household
****
Includes ** Includes
medicinal,
Includes purchase any other
of land, gold, category
ceremonial and also a very small number of loans where a purpose was not stated.
machineries.and ritual and other emergency purposes
*** Includes purchase of land, gold, machineries.
agriculture, livestock and fisheries are the second highest
increases. Nevertheless, business/enterprise loans are the most important in terms of value
** Includes any other category and also a very small number of loans percentage amounting
among all quintiles. This is to be to 19 percent
expected out of total
as business/enterprise usuallyborrowings
involves a larger value
where a purpose was not stated. from TCCSs. Purpose of borrowings shows somewhat similar
requirement (Table 6.17).
*** Includes purchase of land, gold, machineries.
144 H.M.W.A. HEARTH MICROFINANCE 145
patterns of business and construction purposes for both without collateral from both institutions. The main reason for
institutions. But it is different from the purposes of agriculture, this type of collateral requirement arrangement among these
livestock and fisheries, and emergencies loans and loans for MFIs may be because most of the clients employed are the
assets/durables. very poor category in the society and they do not have other
Agricultural and business/enterprise loans are slightly types of valuables that should be used as personal guarantees.
higher among lower income groups while loans for purchasing There is a controversy, however, among the analysts of
assets/durables become a bit more important as household microfinance about the personal and group guarantees as
income increases. Nevertheless, business/enterprise loans collaterals. Some of them argue that personal and group
are the most important in terms of value among all quintiles. guarantees are not collaterals but only an agreement between
This is to be expected as business/enterprise usually involves two parties or among the members. In this research we used
a larger value requirement (Table 6.17). these two items as collaterals because most of the literature
has used and taken them as collaterals in their analyses.
6.4 Terms and Conditions on Loans Group discussions and field observations revealed that
Collateral in the form of assets is waived in most MFIs group guarantees play an important role among the lower
as a method of risk alleviation, it being replaced by a system income groups; nearly one half of the loans obtained by
of guarantors and security deposits. But borrowers still have to individuals in the lowest income group are based on group
meet several conditions which are harder for poorer members guarantee. However, personal guarantees are used to a greater
to fulfill. extent in higher income groups. As a whole, there is no
Table 6.18: Collateral requirements for borrowings considerable difference between two institutions regarding
Type of Collateral Total (%) collateral requirements.
Borrowings TCCSs (%) SEEDS (%)
Land 2 4 0 6.5 Interest Rates
Building/property 1 2 0 An interesting observation in this study is that borrowers
Personal guarantee 62 70 54 and savers have a poor knowledge of the applicable interest
Group guarantee 35 24 46
rates on their loans/savings accounts. In the case of TCCSs,
100 100 100 about 50 percent of loans taken, and about 45 percent of
As shown in Table 6.18, the most common forms of savings/deposit accounts, the exact rates of interest were not
collateral used in obtaining loans are personal and group known by the households. One reason for this, particularly
guarantees that have been used respectively for about 62 with regard to loans, is that the details of all loans taken over
percent and 35 percent of the total loans obtained. Only the past three years are included in this survey, and many
3 percent of loans have been obtained by using land and households are not able to recall the interest rate details of past
building/property using as collaterals. Furthermore, it should loans. For savings, the knowledge/awareness on interest rates
be noted that there are no loans which have been obtained is also poor, particularly with regard to compulsory savings.
The other reason is that when they are taking loans especially
146 H.M.W.A. HEARTH MICROFINANCE 147
personal loans, they are bound to open a savings account. Table 6.20: Loan processing period
Most of the households do not have a sound knowledge Period % of loans
about the interest rates for this compulsory savings and the On request / immediately 1
Within 1 day 2
amount of saved money. Interest rates on loans and deposits
Less than three days 3
of both TCCSs and SEEDS, are similar to the lending rates Within one week 19
and deposit rates discussed in Chapter 5. 1 -2 weeks 44
Table 6.19 shows details of interest rates on loans in a More than two weeks 31
100
different way. 63 percent of the loans have been obtained at
an annual interest rate between 20 percent to 30 percent from 6.6 Credit-plus Services
both TCCSs and SEEDS. With regard to savings, over 80 As mentioned earlier, credit-plus services refer to non-
percent of the accounts receive an annual interest of 10 percent financial services such as vocational training (also include self
or less. This saving – lending interest gap is maintained to employment training – i.e. training on how to start your own
maximize profits. business), marketing assistance (marketing assistance include
Table 6.19: Interest rates: Loans such as help which borrowers receive about new markets for
products that they produce. i.e. super market buyers for curd
Rate of interest ( % P.A.) % of loans % of savings
accounts and vegetables, conducting some exhibitions for handicrafts
< = 10 0 81 and garments), other business development services, social
> 10 < = 15 11 14 welfare and consultancy services, which are provided with, of
> 15 < = 20 14 4 prior to, the provision of credit facilities. These services would
> 20 < = 30 63 1 assist entrepreneurs and the self employed in developing their
> 30 12 0
100 100
businesses.

Loan processing period Table 6.21: Credit-plus services for Households

Service received % of households
It is interesting to note that 44 percent of the loans have Vocational training 16
been obtained within 1-2 weeks. However, 31 percent of loans Marketing assistance 12
taken involve a processing period of over two weeks (Table Other Business Development Services* 22
6.20). This is a fairly lengthy period of time as mentioned by Social Welfare ** 54
Consultancy 43
some of the writers; a long processing period is as a barrier
to obtaining loans and is one of the reasons for households - Percentages are calculated out of those households that have obtained particular
choosing to obtain credit from informal sources. credit-plus services. Columns percentages will not total to a 100% as HHs may
have accessed multiple services from the same MFI.
* Includes technical assistance and services such as training on business and
financial management, project management, accounts/ book keeping.
** Health camps, funeral societies, collective activities (Shramadana).
148 H.M.W.A. HEARTH MICROFINANCE 149
Although, it is believed that credit-plus services are 6.7 Barriers to Access
provided by a number of MFIs, it is important to assess what According to the survey finding we have ascertained
proportion of households are obtaining financial services that 45 percent of households cited high interest rates on
and what proportion of TCCSs and SEEDS are operating in credit and excessive documentation as the key barriers to
the district. Credit-plus services are offered as an exception. obtaining credit (Table 6.23). Collateral requirements, rigid
Around 91 percent of households have received at least one terms and conditions and forced savings/insurance premium
form of credit-plus services from TCCSs or SEEDS they are also important. Similarly, unaware of services provided
deal with. Table 6.21 shows that 54 percent of households by MFIs, non-availability of branches in close proximity and
are receiving social welfare from both institutions, while 43 unfriendly attitudes of bank officers are also considerable
percent of households are having consultancy services. Both factors. However, it is interesting to note that only 3 percent
TCCSs and SEEDS are providing social welfare facilities and of households cited the long time taken for transactions by
consultancy services to a greater extent. However, 11 percent both TCCSs and SEEDS as a barrier to access.
and 21 percent of households are receiving vocational training
and other business development services from TCCSs, whilst Table 6.23: Barriers to obtaining credit
SEEDS is providing these services only for 9 percent and 17 Reason % of response
percent households respectively (Table 6.22). Collateral requirement 38
Too many documents required for loan application 41
Table 6.22: Financial institutions providing creditplus Long time taken for transaction 3
High interest rate on loans 45

Table 6.22: Financialservices
institutions (as %) credit-plus services (as %)
providing
Rigid terms and conditions 35
Institution Vocational Marketing Other business Social Consultancy Unaware of services provided by institutions 21
training assistance development welfare ** Non-availability of branches in close proximity 27
services*
Unfriendly attitudes of bank officers 21
TCCSs 11 15 21 36 42 Inability to understand terms to be filled 4
Restricted banking hours and restricted days 11
SEEDS 9 14 17 42 39
* Includes technical assistance and services such as training on business and financial management, project
Forced savings/insurance premium 36
management, accounts/ book keeping; ** Health camps, funeral societies, Collective activities (Shramadana). Gifts / benefits expected by bank officers 2
*- Includes technical
Percentages are calculated assistance andthatservices
out of those MFIs such
have offered as training
particular credit-plus on business
service. Columnsand
percentages
will not total to a 100% as MFIs may have offered multiple services.
financial management, project management, accounts/ book keeping; ** Health
- Column percentages will not total to a 100% as MF units may have provided multiple form of credit plus services.
camps, funeral societies, Collective activities (Shramadana). Percentages are calculated out of the number of households sampled.
- Percentages are calculated out of those MFIs that have offered particular credit- Multiple responses were permitted therefore percentages will not sum
plus service. Columns percentages will not total to a 100% as MFIs may have to 100 percent.
offered multiple services.
- Column percentages will not total to a 100% as MF units may have provided 6.8 Satisfaction on Accessibility and Services of MFIs
multiple form of credit plus services.
6.7 Barriers to Access
Interestingly, 66 percent of households cited that access
to microfinance is easy while 32 percent of households
According to the survey finding we have ascertained that 45 percent of households cited high responded it was difficult (Table 6.24).
interest rates on credit and excessive documentation as the key barriers to obtaining credit (Table
6.23). Collateral requirements, rigid terms and conditions and forced savings/insurance premium
are also important. Similarly, unaware of services provided by MFIs, non-availability of
branches in close proximity and unfriendly attitudes of bank officers are also considerable
150 H.M.W.A. HEARTH MICROFINANCE 151
Table 6.24: Views on access to MF Further analysis on satisfaction revealed that the
Respond % of respondents category of clients between the ages 25-40 in both institutions
Very easy 32 are satisfied on services provided rather than the other
Easy 34 age categories. It is 45 percent in TCCSs and 24 percent
Difficult 17 in SEEDS. Likewise, in the case of TCCSs, 16 percent of
Very difficult 15 households with individuals below 25 years category were
No idea 2
100
satisfied about the services received while it was 21 percent
in SEEDS. Therefore, we can see that the two institutions
Institutional Preferences are more popular among the young people than among the
It is expected that institutional preferences would to elders (Table 6.26).
a great extent depend on the coverage/outreach of these
institutions. In addition, other factors such as services Table 6.26: Age distribution and satisfaction on services
provided, quality of services, interest rates, reliability/security of MFIs (% of satisfied respondents)
etc. also play an important role when determining satisfaction.
Age level (Years) Respondents %
Nearly 60 percent of households cited that services provided
by both TCCSs and SEEDS are on a highly satisfactory level. TCCSs SEEDS
Only about 10 percent of households responded they are not < 25 16 21
satisfied with the services which were provided (Table 6.25). 25 – 40 45 24
However, there are no considerable differences between 41 – 55 12 15
> 55 14 8
the two institutions regarding the satisfaction on services
provided.
Approximately, about 50 percent people who have
Table 6.25: Satisfaction of respondents on services of MFIs passed the O/L and A/L are satisfied with the services
provided. The amount is quite similar in both intuitions.
Satisfaction TCCSs (% of SEEDS (% of However, primary level educated and no education categories
respondents) respondents) of TCCSs and also quite higher, 23 percent and 14 percent
Highly satisfied 58 56 respectively. In the case of SEEDS, satisfied households in
21 14 these categories are low in a comparative sense (Table 6.27).
Moderately satisfied
11 18
Slightly satisfied 10 12
Responses of these clients were based on what they have
earned by microfinance received. If poor earned less their
Not satisfied
100 100
responses are generally negative. This situation was confirmed
that poorest of the poor benefited less from microfinance.
Percentages are calculated out of total households in each MFI.
152 H.M.W.A. HEARTH
Table 6.27: Level of education and satisfaction on
services of MFIs (% of satisfied respondents)
Education Level Respondents %
TCCSs SEEDS
No education 14 8 the mangers of institutions, and focus group discussions
Primary 23 12
O/L pass 31 22
A/L pass 22 31
Degree/ Diploma 3 4
6.9 Empowerment of Women
Empowerment of women is considered to be a major
outcome of microfinance. Broadly, empowerment refers to an
enhancement of ‘power’ of an individual or a group. MkNelly
and McCord (2001) articulate how microfinance can foster
women’s empowerment. By offering poor households access
to formal of semi-formal financial services, microfinance has
the potential to empower its clients in a variety of ways. (a)
income generating opportunities created through microfinance
could provide greater economic security and power to clients.
(b) group formation and management could link clients with
networks beyond their neighborhood or community.
It is widely accepted that the microfinance programs
that target women have greater empowering potential, because
they are usually marginalized in society. Microfinance services
enable women to develop their own income generating
activities, and thereby to foster internal attitudes (self-reliance,
self-confidence and self-worth). The participating women in
microfinance are also able to develop their external relations
(greater bargaining power within the household and leadership
in the in the community). Small groups, which form the
foundation of most microfinance schemes, empower women
through mutual support, exchanging of new ideas, group
responsibility and leadership.
MICROFINANCE 153
Information on the extent of women’s empowerment
and capacity building facilitated by the TCCSs and SEEDS
in Kandy covered under the survey was collected mainly
by means of the structured questionnaire, discussions with
with the microfinance clients. It was observed that the
group mechanism adopted by the MFIs have substantially
contributed to women’s empowerment and capacity building.
These small groups made up of mothers or women from
each family meet every week. Group meetings have given
the members the opportunity to exchange knowledge
and experience with regard to savings, credit, enterprise
development etc. The mutual cooperation evolved through
this mechanism has helped women to develop self-confidence.
This mechanism has removed the traditional requirement of
collateral or outside guarantee. Consequently, the small group
mechanism has enabled the female, members to develop
“self-help” between families, and to strengthen their living
conditions. These changes are described in detail in the
following sections.
Access and control over private resources: credit,
savings and assets
In order to assess the impact on women we looked
only at the households where a female member is involved
in dealing with a financial institution. Fourty four percent
of households have a female member engaged in financial
activities as a main actor in the household and dealing with
financial institution. Of these, 80 percent indicate that they
have full control over their loans and savings, while in the
case of 20 percent control over their loans and savings is by,
or jointly with, their husband or other family members.
154 H.M.W.A. HEARTH MICROFINANCE 155
Both TCCSs and SEEDS, have provided poor women Table 6.28: Benefits of joining a financial institution
the space and opportunities to gain access to resources. For Benefits % of HHs
many women, this is the first time that they have savings and Training/Skill Development 18
loans in their own names. This has enabled women to feel 59
Capital to start business
more secure during emergencies. Some of the loans have led 14
Knowledge on financial management
to creation of assets (house, land, other properties), and it is 6
Knowledge on health and nutrition issues
mainly women who own these. Women members are able 4
to access bank credit and talk fearlessly with bank officials. Marketing assistance 1
Other 6
Having displayed good repayment records, they are attended
to promptly. Over the years, they have observed an attitudinal No response
change among bankers towards lending to poor women.
Percentages are calculated out of the number of women households.
In nearly 50 percent cases where women do not have Multiple responses were permitted therefore percentages will not sum
full control over the money borrowed, financial activities to 100%.
are carried out with the husband’s assistance. This is very Benefits appear to mainly be livelihood related. 59
significant in activities of agriculture, livestock and fisheries. percent said that they had received capital to start a business,
A few issues need to be looked into. Most productive loans 18 percent had received training/skill development, and 14
taken up by women have been used for very small-scale percent had received knowledge on financial management.
activities (petty shops, land cultivation, dairy, small trading, However, other benefits such as knowledge, health and
and flower plant selling). With notable exceptions, these nutrition issues (6 percent) of women) and marketing
activities become a joint activity for men and women in male- assistance were also obtained by joining a financial institution.
headed households. Many of the positive aspects pertaining to
Compared to the overall availability of credit plus
access to resources and to leadership is higher among group
services at the household level, availability to female is much
leaders than members, and among members who have taken
lower. According to the findings of focus discussion these
repeated loans.
services are provided mostly by TCCSs and SEEDS in Kandy
Of those females carrying out financial activities with whose clientele consist primarily of women.
TCCSs and SEEDS, 83 percent claim they receive other
benefits or services from joining these institutions. The table
6.29 describes these benefits in more detail.
156 H.M.W.A. HEARTH MICROFINANCE 157
Table 6.29: Impact of accessing financial services on factors such as household income, asset base, financial
women
Table 6.29: Impact of accessing financial services on women savings, material savings, integration with community and
No Deteriorated Deteriorated No change Improved Improved
education of children. Access to credit also helps nearly 40
respo- substantially Somewhat Somewhat Substanti percent of households to cope better with various risks and
nse ally
vulnerabilities, access to health services, social recognition,
Decision making power 3 0 1 45 43 4 and standard of living. Overall impact is hard to gauge with
Self-confidence/independence 2 0 1 61 34 2 some households not responding and the majority stating that
Status at home 6 1 2 23 29 6 there is no change in many of the factors. This could be due
Family relationships 2 2 1 12 24 3 to the fact that households do not attribute changes in their
Status in the community 3 1 0 14 32 7
living standards to their ability to access financial services.
Domestic Violence 6 2 1 64 2 1
The lds
househol data indicates
to cope better
b withthat
various
v the
risksmajority of households
and vulneraabilities, acccess to healtthare of the
services, ssocial

viewion,
recogniti thatandaccess
stanndard oftolivicredit hasimpact
ing. Overall not resulted
is hhard to gauginge awith
change in most
some household ds not
Attitude of the husband 7 0 0 58 20 2
of the
respondin factors
ng and m considered.
the majority statiing that therInre is effect,
no channge a negative
in many impact
of the facto was
ors. This cou uld be

Percentages are calculated based on the households who have accessed MFIs
seen by less than 5 percent of households except in the case
due to th
he fact that households d o not attribu
ute changes i
in their livinng standards to their abil
lity to

of household
access finnancial serv income
vices. wherethatabout
The daata indicates the maj 8 percent
ajority of houuseholds of are
households
e of the view w that

Following theirwithinvolvement with TCCSs consider

access o creditthemselves
to has not resulteed negatively
in a chan nge in affected
mostt of the fact bytorshaving access
consideered. to a
In effeect,
Following their involvement TCCSs and SEEDS around 30 percentand
to 45 SEEDS
percent of women
around 30their
percent credit. This could be due to the fact that compulsory savings
negative impact was seen by les
ss than 5 per
rcent of houuseholds exccept in the c
case of houseehold
indicate that decisionto 45 percent
making of women
power, confidence indicate
and independence, that
status theirstatus at
at home,
decision making power, confidence and independence, status and where
income repayment
w of loans
about 8 percent of household reduces
s considerdisposable income
thhemselves nnegatively atbyleast
afffected haaving
the community and family relationships have improved.
temporarily.
access too credit. ThisThiscould beisdue
despecially the
to the faact that com case with
mpulsory savvingsloans whichofare
and reppayment loans
at home, status at the community and family relationships
6.10. Impact of Financial Services not used for income generating purposes.
reduces disposable
d in
ncome at leaast temporar rily. This is especially th
he case withh loans whicch are
have improved. not used for income generating
g purposes.
p
This section attempts to assess whether access to financial services has had an impact on living
Table: 6.30: Poverty reductin achievements: Impact of
6.10. Impact
standard and income of generating
Financial Services
or employment opportunities of households in general. The
access to credit (%)
analysisThis section
of impact attempts
as presented here is ato assessone,whether
subjective based on theaccess
perceptionstoof the
financial services has had an impact on living standard and
households interviewed. In this analysis, the focus is on credit as it is more often access to credit
income
that wouldgenerating or impact
have a significant employment
on the factorsopportunities
mentioned below. of households
in general. The analysis of impact as presented here is a
subjective one, based on the perceptions of the households
interviewed. In this
The Table 6.30 shows analysis,
the perceived theimpact
overall focus is ontocredit
of access credit onas it is more
sampled households of
often
TCCSsaccess
and SEEDS. to credit that would
Over 50 percent havewhoa significant
of households impact
received credit feel that theiron
standard
the factors
of living mentioned
has improved somewhat below.
as a result. This can mainly be seen in the impact on factors
such asThe Table
household 6.30assetshows
income, the perceived
base, financial savings, material overall
savings, impact
integration with

of access to credit on sampled households of TCCSs40 and

community and education of children. Access to credit also helps nearly percent of

SEEDS. Over 50 percent of households who received credit

feel that their standard of living has improved somewhat
as a result. This can mainly be seen in the impact on
158 H.M.W.A. HEARTH MICROFINANCE 159
Also from the focus group discussions it was revealed Table 6.31 shows that the amount of family income
that the positive impact of access to credit is more visible in changed households into a positive direction as well as into
the higher income groups especially in the case of household a negative direction. Around 46 percent of households said
income, standard of living and household ability to cope with that their monthly family income level had increased by Rs.
vulnerability and risk. One possible reason could be the size 2000.00-5000.00 with the use of microfinance, while 9 percent
of loans – those in higher income groups are able to obtain stated their income level declined by the same amount. 33
larger loans which are more likely to have an impact on factors percent of households stated that their monthly family income
such as income, business opportunities, standard of living etc. level had increased by Rs. 5002.00 - 10000.00 when they
started business with microfinance. 24 percent of households
Table 6.31 shows that the amount of family income said that their income level had increased by more than Rs.
changed households into a positive direction as well as into 10001.00 with the transaction of MFIs, while 20 percent of
a negative direction. Around 46 percent of households said households revealed that working with a MFI affected to
that their monthly family income level had increased by Rs. reduce their income level.
2000.00-5000.00 with the use of microfinance, while 9 percent
stated their income level declined by the same amount. 33 6.11. Expectations and Suggestions for Improvement
percent of households stated that their monthly family income This section describes households’ expectations and
level had increased by Rs. 5002.00 - 10000.00 when they suggestions for service improvement of financial institutions.
started business with microfinance. 24 percent of households It provides a good insight on financial institutions, possible
Also from the focus group discussions it was revealed that the positive impact of access to credit
said that their income level had increased by more than Rs. areas of improvement and expansion. Table 6.33 describes
is more visible in the higher income groups especially in the case of household income, standard
10001.00 with the transaction of MFIs, while 20 percent of some of the key expectations households anticipate from
households revealed
of living and that working
household ability to cope withwith a MFIand
vulnerability affected
risk. Oneto
possible reason could be
financial institutions as a whole. It is not surprising that the
reduce their
the size income
of loans leve
– those in higher income groups are able to obtain larger loans which are more
main expectation households have from MFIs is loan size
likely to have an impact on factors such as income, business opportunities, standard of living etc. tailor made to their needs. This is cited by 72 percent of
Table 6.31: Impact of microcredit: Family income change households. In addition 62 percent of households have from
Table 6.31: and income
Impact group (last
of microcredit: five
Family years)
income change and income group (last five
years) MFIs a low rate of interest on loans. 46 percent of households
Monthly family income % of respondents expect simple and quick loan application procedures, and
(Rs.) Increased Decreased just over 40 percent anticipate a financial institution to have
2,000 – 5,000 46 9
5,001 – 10,000 33 6
customer friendly staff and group lending to them. These
10,001 – 15,000 12 4 expectations match closely with the key barriers to access
15,001 – 20,000 6 1 cited in the previous section but the order of importance varies.
> 20,000 4 0
For instance, while 42 percent declared high interest rate to
Overall
Overallfigures are
figures are calculated
calculated as a percentage
as a percentage of theof total
of the total number number of
borrowers. be a barrier to access, 62 percent expected a low interest rate
Percentages are calculated out of number of households who have taken loans for investment projects.
borrowers. Percentages are calculated out of number of households who from FIs.
have taken loans for investment projects.
Table 6.31 shows that the amount of family income changed households into a positive direction
as well as into a negative direction. Around 46 percent of households said that their monthly
family income level had increased by Rs. 2000.00-5000.00 with the use of microfinance, while 9
 percent anticipate a financial institution to have customer friendly staff and group lending to Customer friendly bank staff 43 35
Loans size tailor made to my needs 67 59
them. These expectations match closely with the key barriers to access cited in the previous Provisions of advisory/technical services 12 9
Group lending 41 8
section but the order of importance varies. For instance, while 42 percent declared high interest No response 13 12
rate to be a barrier to access, 62 percent expected a low interest rate from FIs. Percentages are calculated out of total households in each MFI. Multiple responses were permitted for each
160 H.M.W.A. HEARTH MICROFINANCE 161
household therefore percentages will not sum to 100 percent.

Table
Table 6.32: Expectations
6.32: Expectations fromfrom financial
financial institutions
institutions Table 6.34:
Table 6.34: Suggestions
Suggestions for improvement
for improvement
Suggestion % of households
Expectation % of HHs Transaction procedure should be simplified 47
Low interest rate on loans 62 Number of documents required should be reduced 39
Simple and quick loan application procedure 46 Information on available services should be improved 34
A customer friendly atmosphere should be promoted 34
Easy access / proximity 18 Bank branches should be established in close proximity 31
Individual loans 37 Time taken for processing of transactions should be reduced 20
Expectation % of HHs
No collateral requirements
Low interest rate on loans 62
32 Number of business days should be increased 6
Customer
Simple friendly
and quick bank staffprocedure
loan application 46 41 A wider variety of products e.g. money transfer, insurance, 5
Loans size/ proximity
tailor made to my needs 72 training etc. should be improved
Easy access 18
Provisions
Individual of advisory/technical services
loans 37 14 Percentages are calculated out of the total sample of households. Multiple responses were permitted therefore the
No collateral
Group requirements
lending 32 43
Percentages are calculated out of the total sample of households. Multiple
percentages will not sum to 100 percent.
Customer friendly bank staff
No response 41 31 responses were permitted therefore the percentages will not sum to 100 percent.
Loans size tailor made to my needs 72
Percentages
Provisions are calculated out services
of advisory/technical of the total sample of households.
14 Multiple responses were permitted for each Nearly 50 percent of the households suggest that
Percentages
Group lendingare calculated out of the total sample of
household therefore percentages will not sum to 100percent.households. Multiple
43 there should be a simplification of transactions procedures
responses
No responsewere permitted for each household therefore 31 percentages will
not sum toare100percent.
Percentages calculated out of the total sample of households. Multiple responses were permitted for each (Table 6.35). In addition, nearly 40 percent feel that the
household therefore percentages will not sum to 100percent.
Table 6.33: Expectations by across MFIs level of documentation should be reduced. 34 percent of
Table 6.33:
Table 6.33: Expectations
Expectations by across MFIs
by across MFIs the households mentioned that more information should be
Expectation % HHs available on the services provided and a customer friendly
Expectation TCCSs
% HHs SEEDS atmosphere should be promoted. This is in line with the
Low interest rate on loans TCCSs 59 SEEDS 61
Low interest rate on loans
Simple and quick loan application procedure 59
42 61
39 barriers and expectations mentioned previously. Over 30
Simple and quick loan application procedure 42 39
Easyaccess
Easy access / proximity
/ proximity 15 15 12 12 percent households suggest that bank branches should be
Individual
Individual loans loans 36 36 38 38 established in close proximity.
Nocollateral
No collateral requirements
requirements 12 12 14 14
Customer
Customer friendly bankbank
friendly staff staff 43 43 35 35 6.12. Summary
Loans
Loanssize tailor
size mademade
tailor to mytoneeds
my needs 67 67 59 59
Provisions of advisory/technical services 12 9 The financial market in Kandy district of TCCSs and
Provisions of advisory/technical services 12 9
Group lending
Group lending
41
41
8
8
SEEDS, is essentially a microfinance market with over 85
No response 13 12
No response 13 12 percent of households having total borrowings below Rs.
Percentages
Percentages are are calculated
calculated outhouseholds
out of total of total households in eachresponses
in each MFI. Multiple
household therefore percentages will not sum to 100 percent.
MFI. Multiple
were permitted for each
100,000. However, there is a slight difference between the
responses were permitted for each household therefore percentages responses
Percentages are calculated out of total households in each MFI. Multiple will were permitted for each
two institutions. In general, the TCCSs and SEEDS have
household
not sum therefore
to Suggestions percentages
100 percent. will not sum to 100 percent.
Table 6.34: for improvement
Suggestion % of households
somewhat similar savings patterns though the TCCSs show
Table 6.34 outlines expectations from sampled
Transaction procedure should be simplified 47
TCCS a much higher percentage of households with family savings
and
NumberSEEDS units
of documents separately
required should be in Kandy district. Expectation
reduced 39 above Rs. 100,000. The majority of the clients received
Information
to the group on available
lendingservices shouldtwo
from be improved 34
institutions, responses for
A customer friendly atmosphere should be promoted 34 credit-plus services with their loans. There are no significant
other expectations are quite similar from
Bank branches should be established in close proximity both institutions.
31 41 disparities existing with regard to household borrowings and
percent of households said that they expected group lending
Time taken for processing of transactions should be reduced 20
savings across MFIs and male and female clients as well.
Number of business days should be increased 6
from
A widerthe TCCSs.
variety of products e.g. money transfer, insurance, 5
training etc. should be improved

Percentages are calculated out of the total sample of households. Multiple responses were permitted therefore the
percentages will not sum to 100 percent.
162 H.M.W.A. HEARTH
Disaggregating data by gender and age groups shows,
about 82 percent of the microfinance borrowers are in the
age group between 26 and 55 years. Similarly, 84 percent of
the female borrowers are in the age group between 26 and
55 years. Around 90 percent of microfinance clients have
educational qualifications less than GCE (A / L). This implies
that the less educated have benefited from microfinance
facilities. Over 70 percent of clients did not have permanent
employment. They were either self-employed or unpaid
family workers.
Most of the clients received services from theses two
institutions without going too far from their residences. 69
percent of the clients of TCCSs received services without
going beyond 2 km. and 55 percent of the clients from SEEDS.
Thus, microfinance outreach to under privileged rural areas
seems to be at a satisfactory level in to some extent. 71 percent
of the households have accessed both institutions very easily.
Meanwhile, considerable disparities exist with regard to
households borrowings across the income groups with much
higher amounts in the 5th quintile. The average borrowings of
the 5th quintile are more than 16 times that of the 1st quintile.
Business/enterprise development is the main purpose
of borrowing by households, both in terms of value and
number of loans. These loans account to 40 percent of the
total value and about 24 percent of the number of loans
taken by households. Business/enterprise loans are equally
important in both TCCSs and SEEDS. Meanwhile, the
importance of agricultural and housing loans is higher among
lower income groups. The most common forms of collateral
used in obtaining loans are personal and group guarantees.
Meanwhile, both institutions do not use low interest rates for
their loans. Around 91 percent of households have received
at least one form of non-financial services termed as credit-
MICROFINANCE 163
plus services from TCCSs or SEEDS they deal with. Over
50 percent of households feel that their standard of living has
improved somewhat after borrowings. Around 46 percent
of households said that their monthly family income level
had increased by Rs. 2000.00-5000.00. Out of the females
carrying out financial activities with TCCSs and SEEDS, 83
percent claim they have received other benefits or services
from joining these institutions. Benefits appear to mainly be
livelihood related.
According to the survey finding it is ascertained that
45 percent of households cited high interest rates on credit
and excessive documentation as the key barriers to obtaining
credit. Interestingly, 66 percent of households cited that access
to microfinance was easy. Nearly 60 percent of households
cited that services provided by both institutions are in a
satisfactory level. The main expectation of households have
from MFIs is loan size tailor made to their needs. As a whole,
findings of the study indicate that the main challenges for the
microfinance services of TCCSs and SEEDS in Kandy district
lie not in the outreach of financial services but elsewhere.
Despite financial institutions having a rather extensive
coverage, the information gathered in the survey revealed
that there is still a large unmet demand for credit. Another
important observation from the study is that poorer income
groups are less able to derive the benefits of utilizing financial
services than richer income groups. The development in terms
of quantity and quality of credit plus services tailored specially
to the needs of the poor could prove useful in enhancing the
benefits they derive from access to financial services of both
institutions. With regard to women empowerment, the benefits
appear to mainly to their livelihood.
164 H.M.W.A. HEARTH
CHAPTER SEVEN
Impact of Microfinance on Women’s
Empowerment
7.1 Women Empowerment
The discourse on microfinance traverses several fields
including strategies for poverty and vulnerability reduction,
and path ways of women’s empowerment. Sharma (2011)
states that the access to credit via microfinance gen­erates
incomes and livelihood options for women and disadvantaged
segments giving more bargaining power within the household
and contribute to family wellbeing.
The Microcredit Summit held in Washington DC
in 1997 identified four themes–reaching the poorest, the
empowerment of women, building self-sufficient financial
institutions and ensuring a positive and measurable impact
on the lives of clients and their families. Poor women are
particularly empowered by microcredit, as it gives them
ability to earn an income and thus improves their bargaining
positions vis-a-vis their male partners (Gunathilake and de
Silva, 2010; Chang, 2010).
The empowerment concept tends to be primarily applied
to disadvantaged groups of people, and is usually linked to
a vision of more equal living conditions in society (Mishra
and Dale, 1996). Elliot (2008) suggests three closely related
dimensions of empowerment – individual capabilities such
MICROFINANCE 165
as health, education, knowledge, self-confidence, vision,
etc; institutional, cultural and other resources that provide
opportunities and constraints; and agency or processes
through which choices are made and put into effect. The
concept of empowerment is being used increasingly as a tool
for understanding what is needed to change the situation for
women and other marginalized sections of society. Many
researchers have produced empirical evidence that supports
the theoretically–expected relationship between horizontal
associations of people and economic benefits. They claim that
grassroots organizations facilitate spontaneous cooperation.
The participation in a rotating credit device or Self-Help
Group (SHGs) is significant as in that a member can earn a
reputation for being honest and reliable by being a successful
contributor and avoiding default. Hence, SHGs reflect how
social capital facilitates collective actions, and show how
pre-existing social connections mitigate barriers against
collective action. Social capital of this kind is much more
important for those who do not have access to formal credit
markets. People who lack physical capital to offer as collateral
effectively pledge their social connections. Therefore, people’s
associations can generate concrete monetary and economic
benefits (Jayamaha, 1990; Dissanayake, 1991).
The poor rely on social capital to a greater extent than
the non-poor. But the distributional effects of social capital
are likely to be mixed, as some forms of social capital may
assist the poor but some other forms can limit their access
to resources and information. Social interaction facilitates
copying knowledge from those more knowledgeable, but the
pooling of knowledge among a particular set of people can
exclude the poor from knowledge. Against this background,
it is worthwhile to investigate the relationship between social
capital formation through microfinance intervention and its
economic and non-economic outcomes on households.
166 H.M.W.A. HEARTH
This chapter is an attempt to estimate the impact on
clients’ level of socio-economic development considering
poverty and vulnerability reduction, and social capital
formation through group-based loans with SEEDS and TCCSs
in Kandy District as case studies. Group based credit devices
are common in the villages that are the subjects of this present
study, and the study analyzes them as potential sources of social
capital and economic capital for households’ empowerment.
This chapter discusses the ration­ale, impacts and evolution
of thinking on microfinance as a tool in addressing issues
of poverty, vulnerability and women empowerment. It
also investigates the two interconnected arguments on
microfinance and women and its potential for poverty and
vulnerability reduction and women’s empowerment:
• Microfinance as an approach reduces the poverty
and socio-economic vulnerability of women by
generating income and creating livelihood options.
• The institution of group-based loans as a collective
process creates “Social Capital” by providing group
identity, solidarity and spaces for negotiation to alter
gender relations.
The study used TCCSs and SEEDS operating in Kandy
District, Sri Lanka to study the impact on socio-economic
development of women. Both institutions provide their
services to the needy people through a well established branch
network. There were 125 active TCCS units and 108 SEEDS
units in Kandy district by the end of 2007. However, in Kandy
District the initiatives for microfinance projects seeking
poverty and vulnerability reduction outcomes have had mixed
results. In some programs they have worked satisfactorily,
MICROFINANCE 167
while in some other instances they have not. As a result, the
impacts on women’s socioeconomic conditions have also
been often mixed.
The theoretical and conceptual framework discussed
in Chapter 4 facilitated to derive the regression models to
analyze income empowerment capability of microfinance
intervention by TCCSs and SEEDS in Kandy District. To
analyze the impact of microfinance services on income-
poverty and vulnerability of households, econometrics models
were estimated. Three econometric models were used for the
analysis of income-poverty changes, vulnerability impact and
women empowerment quantitatively.
7.2 Quantitative Analysis of Women Empowerment
As mentioned earlier, the methodology of this study
is designed with the assistance on a framework developed
by the SEEP Network (2000) as part of the wider AIMS
program funded by the USAID.1 According to this conceptual
framework, the household is the centre of its analysis. Hence,
it is theorized that microfinance exerts its impact at four levels.
At the household level, at the enterprise level, at the individual
level, and at the community level.
This chapter is mainly based on primary data that was
collected from women households and selected microfinance
units, using a structured questionnaire. This is supplemented
by several focus group discussions with local officials and,
1 The Small Enterprise Education and Promotion (SEEP) Network is an
association of more than Forty U.S. and Canadian NGOs that work with
hundreds of local organizations on microfinance development. SEEP
engages in research, documentation, and training activities aimed at
improving member practice. Since its inception, SEEP has focused on
monitoring and evaluation issues as a critical part of its program; its
Evaluation Working Group facilitates SEEP’s work under the Assessing
the Impact of Microenterprise Services (AIMS) project.
168 H.M.W.A. HEARTH
key informants. Information by focus group discussions was
mainly used for qualitative analysis of microfinance impact on
women empowerment. The 268 households in the total sample
have been used for the analysis. To analyze the poverty and
vulnerability impact of microfinance on women borrowers,
a sub sample of women borrowers was chosen from male
borrowers. Accordingly, there were 119 women borrowers in
the sample. Meanwhile, several qualitative case studies were
conducted in the survey to reveal how microfinance services
provided by TCCSs and SEEDS have helped female clients
to change their attitudes and to enhance their economic and
social status within the family and community. It was expected
to do a situation comparison before and after the credit facility
taken by the households. The procedure/focused areas of the
data collection are as follows;
 at individual level improvements/deterioration
 at family level improvements/deterioration
 business improvements/deterioration
 at community level improvements/deterioration
Following Mishra and Dale (1996), Hossain, Bose and
Ahamad (2004) and Colombage, Ahmad and Chandrabose
(2008), a Women Empowerment Index (WEI) was constructed
to analyze the impact of microfinance on women empowerment
quantitatively. Accordingly, it is assumed that women’s
power in decision making appears in four domains, namely
agricultural activities, domestic affairs, business, and social
affairs. Consequently, we have used rating values from the
lowest value (=1) to the highest value (=5). At the lowest
rating, women are least empowered while at the highest rating
they are most.
MICROFINANCE 169
Agriculture: Selection of crops for cultivation, management
of farm/crops, purchase of inputs such as fertilizer and seeds,
livestock/poultry management.
Domestic affairs: Cash management, tours and recreation,
children’s education, purchase of durable goods, and housing
improvements.
Business activities: To obtain loans, to start a business, to
purchase machinery/equipments, to sell output, and to save
money.
Social affairs: Participation in societies, to obtain a
membership in a society, participation in friendship programs,
participation in loan-group discussions.
1 = decision is made by other family members (out of
household) in the absence of the husband;
2 = by the husband, when he is present without consulting
the wife;
3 = by the wife in the absence of the husband;
4 = jointly by husband and wife, or jointly with others in
the absence of the husband;
5 = by the wife, even when the husband is present.
Hence, the WEI for each domain is computed as follows:
2 = by the husband, when he is present without consulting the wife;
3 = by the wife in the absence of the husband; Table 7.1: Definitions of the explanatory variables
Table 7.1: Definitions of the explanatory variables
4 = jointly by husband and wife, or jointly with others in the absence of the husband;
5 = by the wife, even when the husband is present. Variable Definition
Y Variable
= Y a
Household’s total monthly Definition
income after microcredit taken (Rs
170 H.M.W.A. HEARTH after
MICROFINANCE a 171
Y after = Y
Ybefore = X1 Household’s
Household’s total
incomemonthly levelincome
before after microcredit
borrowing taken (Rs.)
microcredit (Rs.)
Hence, the WEI for each domain is computed as follows: Y
Table
Table =7.1:
7.1:
Distance
before X1=Definitions
Definitions
X2 Household’s
of the of the
explanatory
Distance toincome
explanatory
variables
closest level before
microfinance borrowing
institutionmicrocredit
variables (meters) (Rs.)
Distance
Members = X2 Distance
Numbertoofclosest microfinance institution (meters)
Variable =X3 family members in the household
5 5 5 5
Definition
¦( Ag)
i 1
i ¦(Do)
i 1
i ¦(Bu) i ¦ (Soc) i
Members
YAge
after = Y
a =X
= X4 3 Household’s Number
Agetotalof of family
the household
monthly members in the
head in taken
income after microcredit household
years (Rs.)
WEIAg = ; WEIDo = ; WEI Bu = i 1
; WEISoc = i 1
Age
Ybefore== X X14 Age
Household’s of
incomethe household
level head
before borrowing in years
microcredit (Rs.)
5 5 5 5 Timeyrs
Distance = X2 = XDistance
5 toDuration in an microfinance
closest microfinance institution (meters)program (Number of years)
Timeyrs
Intrestr
Members ==3 XX5 NumberDuration
=X ofRate
familyof in an inmicrofinance
interest
members theon program (Number of years)
credit (percentage)
household
6
Age = X4 = X6 Age of Rate
Intrestr
Credit = X of
the household interest on
head in years
Credit amount (Rs.) credit (percentage)
Where; Timeyrs = X5 7 Duration in an microfinance program (Number of years)
Credit
Edu ===XX
Intrestr
X7 Rate of Credit amount
Education
interest
(Rs.)
level
on credit (percentage)of the household head (No. of years of schooli
6 8
WEIAg = WEI for agriculture Edu
Credit== X X78 Education
Credit amount (Rs.) level of the household head (No. of years of schooling
Cpemp = D 1 Cpemp = 1 if credit-plus of services affected to income e
WEIDo = WEI for domestic affairs Cpemp
Edu = X8 = D
1 Cpemp
Education level of the
otherwise = household
1Cpemp
if credit-plus
head (No. of years
= 0 services
schooling)affected to income em
Cpemp = D1 Cpemp = 1 if credit-plus services affected to income empowerment,
WEIBu = WEI for business activities Ownership =otherwise D2 otherwiseCpemp = 0 Cpemp
Ownership = 1 =if0the household head is an owner of a mi
Ownership
Ownership = D2= DOwnership Ownership
=
when
1 if the
credit = 1 if taken,
household
was the ishousehold
head an owner of head
a micro is an owner
= 0 of a micr
enterprise
Ownershipotherwise Ownership
WEIsoc = WEI for social affairs 2
when credit was taken, otherwise =0
Mkts
Mkts
when
= D3= D3 Markets =Markets
credit
1 if markets
was
= are taken,
1 available
if markets otherwise Ownership
are available
for produce for 0produce by mic
=
by micro enterprise,
Thus, the overall WEI can be expressed as follows:
Mkts = D3 Markets
otherwise Markets = =
otherwise 0 1 if markets are available for produce by micro
Markets =0
FEowner = D4 FEowner = 1 if the household
otherwise Markets head=is0an owner of a micro enterprise when
FEowner = Dcredit 4 wasFEowner
taken, otherwise = 1FEowner
if the =household
0 head is an owner of a micro en
WEI =
WEIAg  WEIDo  WEIBu  WEISoc FEowner = D4 FEowner
credit was = 1taken,
if theotherwise
householdFEownerhead is an = 0owner of a micro ente
4 credit was taken, otherwise FEowner = 0
Binary logistic regression models were estimated to
Binary logistic regression models were estimated to analyze women empowerment. Accordingly,
the logistic model for the study was constructed stating that a household has empowered
In addition to WEI, three regression models were analyze women empowerment. Accordingly, the logistic
In addition to WEI, three regression models were estimated with four criteria/determinants to Binary by
financially logistic regression
microfinance models
services (Y=1) were estimated
or otherwise to analyze
(Y=0). For estimation women
purposes, the empowermen
estimated with four criteria/determinants to analyze the model logistic
Binary for the regression
study wasmodels constructed stating that
were estimated a household
to analyze women empowerment.
Logit model as follows:
analyze the poverty and vulnerability impact of microfinance services on women. Determinants hastheempowered
logistic model for the study was constructed stating that a household h
poverty and vulnerability impact of microfinance services the logistic modelfinancially
for the study by microfinance
was constructed services
stating (Y=1)
that a household has
of empowerment by microfinance services are access, creation and control over private resources
on women. Determinants of empowerment by microfinance orfinancially
otherwise (Y=0).
Li =by
º For estimation
ln «microfinance
ª Pi services
= β1 + β2Xi + ui purposes,
(Y=1) or the Logit
otherwise
6
model
(Y=0). For estimation
(credit, savings and assets), freedom of decision making at home, self-confidence on financially
asLogit
follows: by microfinance »
¬1  Pi ¼ services (Y=1) or otherwise (Y=0). For estimation p
services are access, creation and control over private resources model as follows:
socioeconomic activities, and status in community and family (relationships, participation in Logit
Where, model as follows:
(credit, savings and assets), freedom of decision making
village societies, social mobility). Based on these criteria the study assumes that; if these four
at home, self-confidence on socioeconomic activities, and ⎡ Pi ⎤
variables have positively affected a woman after micro financing, then she is empowered by L = the log of the odds Li =
ratio. ln⎡ Pi ⎤ ⎥ = β1 + β2Xi + ui 6
status in community and family (relationships, participation Li = ln ⎢ ⎢⎣1 − Pi ⎦= βwhere
1 + β2Xi + ui 6
in village services
microfinance received.
societies, The variable
social definitions
mobility). Basedare given in the Table
on these 7.1
criteria
Pi = the probability of financial 1 − Pi ⎥⎦
⎣ empowerment, Y = 1.
1 – Pi = the probability of not financial empowerment, where Y = 0.
the study assumes that; if these four variables have positively XWhere,
is a vector representing explanatory variables given in Table 9.1.
affected a woman after micro financing, then she is empowered Where,
Ui is the random error term.
by microfinance services received. The variable definitions
are given in the Table 7.1 L = the log of the odds ratio.
L = the log of the odds ratio.
Pi = the probability of financial empowerment, where Y = 1.
Pi = the probability of financial empowerment, where Y = 1.
1 – Pi = the probability of not financial empowerment, where Y = 0.
1 – Pi = the probability of not financial empowerment, where Y = 0.
X is a vector representing explanatory variables given in Table 9.1.
7.1
X is a vector representing explanatory variables given in Table 9.1.
Ui is the random error term.
Ui is the random error term.
172 H.M.W.A. HEARTH MICROFINANCE 173
The difference between three models depends on usage Table 7.2: Women’s Empowerment Indices
Table 7.2: Women’s Empowerment Indices
of four criteria for the poverty and vulnerability impact
analysis of microfinance services of women borrowers Activity TCCSs SEEDS Both MFIs % Difference
Before After Before After Before After
mentioned above. The first model assumes that if the four Agriculture 3.75 3.98 3.99 4.01 3.87 4.00 3.36
variables have positively affected a woman then she is Domestic 4.21 4.35 4.60 4.62 4.40 4.49 2.04
empowered by microfinance services received. The second Affairs
model assumes that if the three criteria positively affected Enterprise 3.41 3.88 3.42 4.43 3.41 4.16 22.0
the client is empowered. The third model assumes that if two
criteria were fulfilled positively the client is empowered. Social Affairs 3.12 3.22 3.56 3.60 3.34 3.41 2.10

Overall 3.62 3.86 3.90 4.17 3.76 4.02 26.0

7.3 The Women Empowerment Index (WEI) 

The subdivision-wise and overall WEIs clearly illustrate The

The study usedstudy used four criteria/determinants
four criteria/determinants for the impact of
for the analysis of poverty and vulnerability
an improvement after joining the MFIs (Table 7.2). This analysis of poverty and vulnerability impact of microfinance
microfinance services on women borrowers namely access, creation and control over private
supports the argument that microfinance enables women to services on women
resources, freedom borrowers
of decision namely
making at home, access,oncreation
self-confidence and activities,
socio-economic
improve their empowerment through reducing poverty and control over private resources, freedom of decision making
and status in community and family. This study assumes that if these four variables have
atpositively
home,affected
self-confidence on socio-economic activities, and
vulnerability. The decision making power is a very crucial a woman then she is empowered by microfinance services received. The
status in community and family. This study assumes that
factor in gender studies. If a woman benefitted to attain her description of the decision criteria was based on four aspects namely, reducing vulnerability
if these four variables have positively affected a woman
power through micro financial intervention, especially joining through asset creation, independence of decision making at home, self-confidence on
then she is empowered by microfinance services received.
a small group loan, it is necessary to pay attention on these socioeconomic activities and improvements of status in community and family.
The description of the decision criteria was based on four
findings at a considerable level by policy decision–makers. aspects namely, reducing vulnerability through asset creation,
Colombage, Ahmad and Chandrabose (2008) also independence of decision
7.4 Regression Analysis on Women making
Empowerment at home, self-confidence
on socioeconomic activities and
Three binary logistic regression models improvements
were estimated of status
and the differences in the three
between
confirmed these positive achievements for women through
community
models depended andon family.
the usage of four criteria for the analysis of poverty and vulnerability
group loans at high levels from their findings. This is a very impact of microfinance on women. The results are presented in Table 7.3. As depicted all the
supportive result that microfinance is significantly important 7.4 Regression
models Analysis
have satisfactory goodness-ofonfit.Women Empowerment
for development of social capital among the group members Three binary logistic regression models were estimated
because this transaction is intentionally occurring between the and
Modelthe1. The
differences between
results indicate that only Ythe
before three
(incomemodels depended
level of household beforeon
microcredit),
group members. It is necessary to build up trust, friendship, the
age usage of fourhead
of the household criteria for theof analysis
and availability of poverty
markets for production were and
the significant
reciprocity, net works and positive interactions among group vulnerability
variables affectingimpact of microfinance
women empowerment and reducingon women. The
vulnerability. results
However, the variables
members to achieve high-quality results individually as well are presented
Ybefore and Age areinsignificant
Table 7.3. As depicted
at 10 percent level whileall
thethe models
variable Mkts ishave
significant at 5
as within the group. Therefore, we can confirm that both MFIs satisfactory
percent level. Ygoodness-of
before is negatively fit.
affected women empowerment. The reason for this situation
achieved their targets at satisfactory levels.
174 H.M.W.A. HEARTH
Model 1.
The results indicate that only Y before (income level
of household before microcredit), age of the household
head and availability of markets for production were the
significant variables affecting women empowerment and
reducing vulnerability. However, the variables Ybefore and Age
are significant at 10 percent level while the variable Mkts
is significant at 5 percent level. Ybefore is negatively affected
women empowerment. The reason for this situation might
be due to the following; this income is family income, and
there is no clear evidence regarding who controls the money
before receiving microfinance; also it is not clear who earns
this money. Then there is no power to use this money as a
head of the households by female. Thus, the expected result
of this variable is ambiguous.
The rest of the explanatory variables were not significant
in determining women empowerment and vulnerability
reduction. Of the variables considered, access to the market
is the prominent variable. Marginal effects of the variable
demonstrates that if the women respondents have enough
market facilities for their products, the probability of
empowerment and vulnerability reduction increases by 51
percent. In other words, respondents who have the market
facilities are able to empower by 51 percent relative to
those who does not have market facilities. This indicates
that availability and accessibility of markets is always a
significant factor for the income and profit increases of any
kind of micro enterprise. Similarly, if the household head’s
age is high enough, the probability of empowerment has a
tendency to increase.
Model 2:
All other things are ceteris paribus except status in
community and family criteria. This criterion has been
MICROFINANCE 175
omitted purposely from the regression analysis to see
whether empowerment probabilities of explanatory variables
have changed or not. Accordingly, access and control over
private resources, freedom of decision making at home,
self-confidence on socio-economic activities are used as
determinants of poverty and vulnerability reduction. If these
three variables have positively affected a woman after the loan,
then she is empowered by microfinance services received. All
independent variables are the same as before. The dependent
variable in this model is named as FEemp2new.
According to the logistic results, the model is statistically
significant. Confirming this situation, the results indicate that
only age of the household head and markets availability for
products were significant at 10 percent and 5 percent levels
respectively affecting women empowerment and reducing
vulnerability. Marginal effects of the variable shows that if
age of the household head has increased by 1 year, probability
of women empowerment will rise by 13 percent. All other
explanatory variables are not significant in determining
women empowerment and vulnerability reduction.
176 H.M.W.A. HEARTH MICROFINANCE 177
Table 7.3:
Table 7.3: Estimates
Estimates of the
of the binary binary
logistic models logistic models or not. All independent variables are the same as before.
Model 1 Model 2 Model 3
The dependent variable in this model is named as FEemp3.
Dependant Dependant Dependant Logistic regression was estimated with 119 observations.
Variable Variable: Variable: Variable: According to the logistic results the model is statistically
FEemp1 FEemp2new FEemp3
Coefficient Coefficient Coefficient significant. However, the results indicate that only availability
Ybefore = X1 -.0000847* -.0000544 -.0000621
of markets for products was the significant variable affecting
(.0000502) (.0000494) (.000048) women empowerment and reducing vulnerability. All other
Distance = X2 -.0003991
(.0003647)
-.0003406
(.0003728)
-.0002325
(.0003349)
explanatory variables are not statistically significant. The
Cpemp = D1 .3238384 .2236535 -.2913357 marginal effects of the variable demonstrates that if the women
Members =X3
(.6232492)
.406098
(.6713099)
.2981193
(.6320816)
.0502575
respondents have enough market facilities for their products
(.282796) (.3104971) (.2590748) the probability of empowerment and vulnerability reduction
Age = X4 .0510339* .0621138* .0332347 increases by 60 percent. In other words, respondents who
(.0298027) (.0328229) (.0267108)
Timeyers = X5 .1177407 .1948504 .2252616 have the market facilities are able to empower by 60 percent
(.1701585) (.1920444) (.1761177) relative to those who have not market facilities.
Interstr = X6 .0289472 -.0317077 -.0150807
(.0617658) (.0672675) (.0588857)
Credit = X7 .0000111 .0000163 .00002 7.5 Qualitative Analysis on Women Empowerment
(.00000132) (.0000156) (.00000151)
Edu = X8 .1352217 .1659232 .1409216 A number of qualitative case studies have been carried
(.1483946) (.1599718) (.1369145) out to reveal how microfinance services provided by TCCSs
Mkts D3 3.029121** 3.614117** 2.866808**
(.8008109) (.8763752) (.7099104) and SEEDS have facilitated women to improve their attitudes,
FEowner = D4 .6788804 -.1343146 -.2836427 net works, trust and reciprocity, and to enhance their status
(.562554) (.6380226) (.5676683)
Intercept -8.623199 -7.883023 -4.69441 within the family and community through social capital
(3.227081) (3.480371) (2.714855) formation2. The procedure and the results of the analysis are
No. of observations 119 119 119
as follows;
Pseudo R2 0.4293 0.5122 0.4060 At individual level: Prior to joining the MFIs, the
female borrowers were mostly constrained to the traditional
Note: Standard errors are within parenthesis. housewife’s functions such as cooking, collecting fire wood,
Dependent Variable: a household has empowered financially by MF services (Y=1) or otherwise (Y=0).
** Significant at 5 percent level, * Significant at 10 percent level feeding and caring children and housekeeping. They had poor
self-confidence with this marginalized situation. They mainly
Model 3: All other criteria remain unchanged except two depended on the husband’s income or government subsidy and
decision did not possess any savings. Male dominance was prevalent
Model 3: criteria
All other namely, self-confidence
criteria remain unchanged excepton socioeconomic
two decision criteria namely, self-
activities, and status in community and family. These in family as well as in society. Men are considered by women
confidence on socioeconomic activities, and status in community and family. These determinants as well as by other men as working harder, and as the bread-
determinants have been omitted purposely for the regression
have been omitted purposely for the regression analysis to see whether empowerment probability 2 This survey especially conducted for the collection of information from
analysis to see whether empowerment probability has changed group loans.
has changed or not. All independent variables are the same as before. The dependent variable in
178 H.M.W.A. HEARTH
earners for their households. Women, on the other hand, are
considered as supplementary earners. They are expected
to do all the household work, unless their female children
start helping them. Men’s participation in household work is
found only in few cases, and is restricted to fetching water
(if the source is far away) and chopping fire wood for fuel.
No choice is available either with respect to what productive
work women can do, as it is shaped by the norms on division
of work between men and women. For instance, with respect
to paddy cultivation, women are allowed to do only weeding,
transplanting, and harvesting as per the division of labour;
these tasks fetch lower wages than ploughing, which only
men do.
Focus group discussion also revealed that men have
more leisure time than women. As soon as a man is free, he
cycles or walks to a tea stall or a common place where other
men gather. Women use their leisure time to sleep, listen to
the radio or watch television - nothing beyond that. But since
joining the microfinance programs female clients have been
able to improve their self-confidence and self-worth. Now
they are more social and they have gained ability to express
their ideas and views in public. They are engaged in income-
generating activities and as a result they have more decision
making power. Likewise, now they have a little savings but
not as expected.
At family level: Before joining the microfinance
programs rural women were basically attached to the
traditional wife/mother role in the family while the husband
used to be the one and only wage earner if there are no young
male members in family. Thus, there was gender based
division of labour in the family. Despite housework, the wife
often supported her husband’s income generating activities
providing unpaid labour. Decision making on activities such as
MICROFINANCE 179
social, economic, cultural and any other kinds was principally
made by the husband or another male family member. A
gradual change of these family relationships in favour of
females can be observed after they joined the programs. The
group loans have given them the opportunity to broaden their
possibility beyond the traditional wife/mother role. Now they
have interaction with others, and engage in income generating
activities. As a result, they have gained more bargaining and
decision making power within the family.
However, still most of rural women members think
that men’s work contribution is more important than theirs
as it brings in greater revenues to the family. They do not
value their (unpaid) housework. Women’s control on wages
and expenditure for personal consumption is very low. As
women say, ‘We spend only for our homes,’ Men, on the
other hand, spend on themselves and have higher control on
expenditure. Women seem to have a fair amount of say on
small household expenditure, but they have to take the consent
of their husbands for major expenditure.
Business: As the poor rural women did not have access to
formal financial institutions, they did not have any opportunity
to initiate business enterprises before joining the TCCSs or
SEEDS. As most of the rural women are not much educated
and are of myopic behavior, they lack entrepreneurship
skills. Both TCCSs and SEEDS have provided opportunities
to rural women to overcome most of these barriers through
credit plus services such as skill development, training,
educational activities, marketing assistance, supply of inputs
and business development services3. Borrowings, savings
and other facilities provided through group loans by MFIs
3 Business development services includes technical assistance and services
such as training on business and financial management, accounts/book
keeping.
180 H.M.W.A. HEARTH MICROFINANCE 181
have enabled them to start their own business and improve Similar type of socio-economic relationships improvements
the financial position. through group loans can be pointed out from literature.
Women’s physical mobility has expanded by attending Padia (2006) pointed out that in India, women empowerment
meetings and training programs as well as through visits to impact at the collective level has achieved greater benefits.
banks. Enterprise activities have also contributed to enhanced Many cluster leaders are getting ready to participate in
mobility as they involve visits to local and distant markets. panchayat elections, with the backing of the groups. Women,
Some of the women members have traveled to villages and in particular, leaders, are looking for their own space to make
cities they had never seen before. Unlike in the past, they an impact so that they can be heard and can negotiate with
now travel without their husbands, either alone or with other the government. Panchayats at the local level now recognize
women. Enhanced mobility and interaction have increased kalanjiams (Savings and Credit Self-Help Group in India)
women’s confidence, courage and access to knowledge and and invite the group leaders to attend Gram Sabha meetings.
information. Of course, they have improved social capital According to Padia, in some villages, the panchayat have
such as trust, reciprocity and more ties and interactions provided the SHG with space for conducting meetings. In
among themselves. While men do not entirely support of Gram Sabha meetings, SHG have taken up infrastructure
these changes, most do not object either as economic benefits issues such as access to electricity, drinking water facilities
accumulate to the family. In some instances women have gone and roads.
out on group meetings against the wishes of their husbands
and sons.
At community level: Before joining the MFIs, the
female borrowers did not have much relationship with
the community. There was hardly any responsibility or
consciousness towards the community. No cooperative
efforts were made for community development. But active
relations with group members have led to a change in this
circumstance enormously. Active participation in village
level organizational activities and other community work
have empowered women to build up their self-confidence,
networks, reciprocity, attitudes and income generation
capabilities. Various credit-plus services such as awareness
programs, and festivals conducted at the village level have
enhanced collective conciseness and society harmony. The
general opinion of most of the group members is, “we feel like
a one big family, now with a greater unity among members”.
182 H.M.W.A. HEARTH
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