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MICROFINANCE Financing the poor (An Overview)
Submitted in partial fulfillment of the Requirement for the degree of MBA, (2007-09) INTERNATIONAL SCHOOL OF INFORMATICS AND MANAGEMENT, JAIPUR
Table of Contents
5 6 7 12 13 14 15 16 17 19
Elements of Microfinance
2. History of Microfinance 3. Microfinance Approach 4. Need for Micro – Financing
• • • •
Who are client of microfinance? How it helps the poor people? Aren’t poor too poor to save? When is microfinance NOT an appropriate tool
5. Types of Organizations and Composition of the Sector • Formal sector
Semi – Formal sector Informal sector What are MFIs and SHGs? 25 26 27 28 28 32 33 34 36 42 44 46 47 48
6. Can microfinance be profitable? 7. Why do MFIs charge high interest rates to poor people? 8. Impact of microfinance over poverty 9. Current Scenario of Micro - financing in India
• • • •
Indian economy and microfinance Govt. role in supporting Microfinance Microfinance and capital requirement Challenges in Indian context
10. Status of microfinance in Rajasthan 11. Microfinance for Women in India • • Women’s role in economy Women and Microfinance Women’s Micro enterprises Women’s participation in Microfinancing activities •
Women can make Microfinance succeed in India 50 51 52 52 53
Rural finance for rural women Rural women at a glance o Rural finance & rural poverty o Need credit to rural women o Loan facilities to rural women
Bibliography Training of and information for rural women 60 61 61 63 1. it is . To most. As defined by the Asian Development Bank (ADB).o Saving facilities to rural women Sources of finance available o Savings/Loans available in unofficial financial sector o Various obstacles to unofficial financial sectors efficiency o Official system : financial institution o Obstacles preventing access to official financial sector 54 55 56 56 58 58 o Agriculture organization providing financial services 60 o Rural women’s access to facilities provided by agriculture organization 12. payment services. and insurance to poor and low-income households and their micro-enterprises.A provision of a broad range of financial services such as deposits. microfinance means providing very poor families with very small loans to help them engage in productive activities or grow their very small 4 . money transfers. Introduction Micro financing is the provision of financial services to poor and low income households without access to formal financial institutions. loans. Conclusion 13.
Micro credit can be offered. They save and borrow. often without guarantee. many poor people need and use financial services all the time. As a result. insurance. Microcredit is a part of microfinance. begin to build wealth and exit poverty. These individuals lack collateral. insurance. • Elements of Microfinance Microfinance refers to loans. to poor entrepreneurs and to others living in poverty who are not considered bankable.businesses. However. the financial services available to the poor often have serious limitations in terms of cost. to an individual or through group lending. Microcredit is the extension of very small loans (microloans) to the unemployed.) as the industry has come to realize that the poor and the very poor that lack access to traditional formal financial institutions require a variety of financial products. Microcredit is a financial innovation which originated in Bangladesh where it has successfully enabled extremely impoverished people to engage in selfemployment projects that allow them to generate an income and. risk and convenience. etc. Like us. transfer services and other financial products targeted at low-income clients. microfinance has come to include a broader range of services (credit. over time. Indeed. there are some 500 million low income entrepreneurs in the world and about 5% have access to financial services. steady employment and a verifiable credit history and therefore cannot meet even the most minimal qualifications to gain access to traditional credit. which is the provision of a wider range of financial services to the very poor. savings. in many cases. savings. Due to the success of 5 . invest in home repairs and improvements and meet occasional and domestic expenses such as food and school fees. Micro credit refers to a small loan to a client made by a bank or other institution.
In this definition. issued in 2005 by the Indian Insurance Regulatory and Development Authority (IRDA). usually across borders to family and friends.microcredit. thus. The Micro-insurance Regulations. Often without minimum balance requirements. and designed to service low-income peMicro-insurance is insurance with low premiums and low caps / coverage. 6 . remittances are a relatively steady source of funds. Although almost everyone in larger development organizations discounted the likelihood of success of microcredit when it was begun in its modern incarnation as pilot projects with ACCION and Muhammad Yunus in the mid1970s. microcredit is increasingly gaining credibility in the mainstream finance industry and many traditional large finance organizations are contemplating microcredit projects as a source of future growth. Remittances are transfers of funds from people in one place to people in another. Micro-insurance is a term increasingly used to refer to insurance characterized by low premium and low caps or low coverage limits. many in the traditional banking industry have begun to realize that these microcredit borrowers should more correctly be categorized as pre-bankable. for example. Microsavings are deposit services that allow one to store small amounts of money for future use. Compared with other sources of capital that can fluctuate depending on the political or economic climate. sold as part of atypical risk-pooling and marketing arrangements. adopted this definition in explaining “micro-insurance productsople and businesses not served by typical social or commercial insurance schemes. the United Nations declared 2005 the International Year of Microcredit. “micro” refers to the small financial transaction that each insurance policy generates. savings accounts allow households to save in order to meet unexpected expenses and plan for future investments.
However. These include informal arrangements like moneylenders. Adding up the various capital requirements for all 42 of the women. History of Microfinance 1970s & 1980s: THE PIONEERS Informal financial mechanisms have traditionally serviced the billions of poor households in developing nations. Muhammad Yunus returned to Bangladesh to teach at Chittagong University after receiving a PhD in economics in the United States. He and some students interviewed 42 impoverished women and found that they were all hardworking people who were paying outrageous fees to suppliers because they could not pay in cash. Therefore the repayment rates were not always high. pawnshops.2. and saving and loan clubs. simultaneous efforts launched the microcredit movement and it started having an economic development impact in the lives of thousands of families. Yunus found out that US$27 was all that was required for these women to be able to purchase their usual 7 . but each of the women had very little money left after paying their suppliers back. A summary of their stories helps to see the varying ways that microcredit got its start. Then. The suppliers made money. He returned to a newly independent country devastated by war that was trying to deal with a multitude of economic problems. Grameen Bank In the mid-1970s Dr. After World War II some economic development initiatives focused on providing agricultural credit to marginalized farmers. these loans were highly dependant upon weather and crop success. Another source for funds often comes from relatives. Three of the organizations in Small Fortunes were pioneers in the movement. in the 1970-1980s. loan sharks. It was not long before Professor Yunus realized that the economic theories and practices he learned were useless in dealing with the abject poverty he saw every day as he commuted to and from his college office. or selling their products through them.
Not being secretive about their success. Brazil. and within weeks was paid back-and each of the women had enough profit to continue to directly purchase their suppliesinstantly making more profit than they ever had before. regulated financial institutions exist to provide microcredit services to impoverished families.supplies directly and bypass the creditors. ACCION provides technical assistance to many other microfinance institutions worldwide. fifteen ACCION-affiliated. a studentformed organization started providing microloans in Recife. Each time he was rebuffed with the comment. This later became ACCION International. ACCION International In a similar case during the 1970s. ACCION has been an innovator in creating similar organizations as a method for reaching large numbers of microentrepreneurs in their respective countries. Ninety-six percent of Grameen Borrowers are women. the Grameen system goes out of its way to share information about itself-helping to start hundreds of Grameen replication programs in many countries around the world. ACCION is a key innovator at the forefront of efforts to bring microloans to microentrepreneurs through regulated financial institutions. the first commercial bank dedicated solely to microenterprise. with a loan recovery rate of 98. Like the other pioneers mentioned in this overview. "The poor aren't credit worthy!" By the end of 2005 we estimate that the Grameen Bank will reach over 5 million borrowers. Over time ACCION broadened its microcredit efforts and in 1992 helped form BancoSol in Bolivia. Yunus repeatedly went to the formal Bangladeshi bankers to show them his progress in providing credit to the poor. 8 .93 percent. This was the start of the first Grameen Bank (Bangla for Village Bank). The Grameen system has subsequently started providing other financial services (such as housing loans and educational loans) and has found unique ways to help Bangladeshi microentrepreneurs start new businesses (such as Grameen Phone). In 2005. He gave each of the woman the small amount of money needed.
was formed to bring microcredit services to large urban populations in the United States who likewise find it difficult to access credit through normal banking institutions. in the 1980s. FINCA works in 23 countries. He found success similar to Grameen and ACCION and formed the Foundation for International Community Assistance (FINCA). establish goals for the movement.900 people from 137 countries attended. FINCA International Meanwhile. we estimate that the ACCION-affiliated programs will have reached over 5 million borrowers. Over 2. he got the idea of providing loans to women to finance their microbusinesses. a subsidiary. In 2005 we estimate that FINCA will reach over 2 million borrowers. mostly with women. ACCION USA. A pivotal moment occurred in 1997 when the first Microcredit Summit was held in Washington. 1990s: A MOVEMENT In the 1990s the microcredit movement took hold and microcredit was established as a viable development tool. FINCA's Village Banking replication programs have been started in over 32 countries throughout the world. the founder of the Microcredit Summit Campaign.In the 1990s. By the end of 2005. John Hatch was inspired with the same lending principles in Bolivia. Just as in Grameen and ACCION's cases. is interviewed in Small 9 . Sam Daley-Harris. While finding it increasingly difficult to provide agricultural loans. and focus on innovations to improve microcredit practice. DC and the Microcredit Summit Campaign was launched. and has a loan repayment rate of 97 percent. ACCION borrowers have a historical repayment rate of 97 percent. FINCA readily shares its Village Banking model with others. and a goal was set to reach 100 million of the world's poorest families by 2005. Networks and associations were started to facilitate the sharing of best practices. FINCA is the organization from which Sonia (mentioned at the beginning of this introduction) received her loan.
Specific reference to reaching the poorest means those borrowers living on less than US$1 a day or the bottom 50 percent of those living below a country's poverty line. 2. At the end of 1999 the Microcredit Summit Campaign reported that 23. India has over 32. There are 3 main factors that count to the bringing up of Microfinance as a Policy in India 1.5 million borrowers had access to microcredit—13.’ This program is interesting to 10 . regulated financial institutions.000 rural branches of commercial banks and regional rural banks. History of Microfinance in India In India.000 cooperative bank branches. institutional credit agencies (banks) made an entry in rural areas initially to provide an alternative to the rural money lenders who provided credit support.Fortunes. but not without exploiting the rural poor.2% increase in rural bank branches in India between 1973 and 1985.75 million of these were classified as the poorest. and nongovernmental organizations (NGOs). Today. The first of these pivotal events was Indira Gandhi’s bank nationalization drive launched in 1969 which required commercial banks to open rural branches resulting in a 15. The second national policy that has had a significant impact on the evolution of India’s banking and financial system is the Integrated Rural Development Program (IRDP) introduced in 1978 and designed to be ‘a direct instrument for attacking India’s rural poverty. The Microcredit Summit Campaign has held a subsequent Microcredit Summit +5 conference in 2002 and multiple regional conference in intervening years. By the end of the 1990s microfinance institutions had taken on many forms such as nonprofit organizations. 14.
which even threatened the viability of banking institutions and sustainability of their operations. margin. Passing of Mutually Aided Co-op. tangible collateral. • Reserve Bank of India Act. that resulted in a large section of the rural poor shying away from the formal banking sector. it was not possible for them to allow a population of close to 300 million . • • • • Nationalization of banks in 1969 Regional Rural Banks created in 1975. The search for an alternative mechanism for catering to the financial service needs of the poor was thus becoming imperative. etc.to remain outside the fold of its business. The systems and procedures of banking institutions was emphasizing on complicated qualifying requirements.this study because it was a large program whose main thrust was to alleviate poverty through the provision of loans and it was considered a failure.even if poor . 3. 1934 provided for the establishment of the Agricultural Credit Department. Legal framework for establishing the co-operative movement set up in 1904. The banks too experienced that the rapid expansion of branch network was not contributing to an increasing volume of business to meet high transaction costs and risk provisioning. NABARD established as an apex agency for rural finance in 1982.. The last major event which impacted the financial and banking system in India was the liberalization of India’s financial system in the 1990s characterized by a series of structural adjustments and financial policy reforms initiated by the Reserve Bank of India (RBI). At the same time. Microfinance approach 11 . • • Microfinance has been in practice for ages (though informally). Act in AP in 1995. 3.
As a result. but members continue to borrow at these high rates.(some institutions in India are already lending to groups or SHGs at higher rates . even those who can borrow individually from banks) 'Peer pressure' in groups helps in improving recoveries. perpetuated a dependant status on the beneficiaries and depended ultimately on the govt.Microfinance approach is based on certain proven truths which are not always recognized. employees for delivery. these programs became unsustainable. Need for Micro – Financing Since independence. various governments in India have experimented with a large number of grant and subsidy based poverty alleviation programs. These programs were based on grant/subsidy and the credit linkage was through commercial banks only. This not only led to misuse of both credit and subsidy but banks never looked at it as a profitable and commercial activity as well. • • • 4. These are: • That the poor are bankable. have the inherent capacity to save small amounts regularly and are willing to save provided they are motivated and facilitated to do so That easy access to credit is more important than cheap subsidized credit which involves lengthy bureaucratic procedures . successful initiatives in micro finance demonstrate that there need not be a trade off between reaching the poor and profitability . 12 .this may prevent the groups from enjoying a sufficient margin and rapidly accumulating their own funds.micro finance constitutes a statement that the borrowers are not 'weaker sections' in need of charity. but can be treated as responsible people on business terms for mutual profit That almost all poor households need to save.
Access to conventional formal financial institutions. In urban areas. India thus adopted the similar model of extending credit to the poorest sector and took a no. they are usually small farmers and others who are engaged in small income -generating activities such as food processing and petty trade. the chances are that. microfinance activities are more diverse and include shopkeepers. of steps to promote micro-financing in the country. 3. Commercial & Industrial Bank in Philippines etc. Success stories in neighboring countries. In rural areas. informal arrangements may not suitably meet certain financial service needs or may exclude you anyway. gave further boost to the concept in India in the 1980s.Hence was adopted the concept of micro-credit in India. On the other hand. like Grameen Bank in Bangladesh. artisans. Moreover. street vendors. the poorer you are. Individuals in this excluded and under-served market segment are the clients of microfinance. the more expensive or onerous informal financial arrangements. Bank Rakiat in Indonesia. service providers.1 Who are the clients of microfinance? The typical microfinance clients are low-income persons that do not have access to formal financial institutions. Microfinance clients are poor and vulnerable non-poor who have a relatively stable source of income. 13 . for many reasons. often household-based entrepreneurs. is directly related to income: the poorer you are the less likely that you have access. etc. Microfinance clients are typically selfemployed.
maintaining savings accounts.Microfinance generally targets poor women because they have proven to be reliable credit risks and when they have the financial means. they invest that money back into their families. As we broaden the notion of the types of services microfinance encompasses. As the definition of the types of services microfinance encompasses broadens. providing insurance . say. and various insurance products. have increased mobility. For instance. are more visible in their communities and play stronger roles in decision making. but rather. would like a safer place to save the proceeds from their harvest as these are consumed over several months by the requirements of daily living. Studies have shown that women become more assertive and confident. By providing access to financial services . resulting in better health and education. the potential market of microfinance clients also expands. For example. many very poor farmers may not really wish to borrow. For instance.loans and responsibility for repayment. but rather. micro credit might have a far more limited market scope than. a more diversified range of financial services which includes various types of savings products. and stronger local economies. For example. many very poor farmers may not really wish to borrow. payment and remittance services. 14 . micro credit might have a far more limited market scope than say a more diversified range of financial services which includes various types of savings products. would like a safer place to save the proceeds from their harvest as these are consumed over several months by the requirements of daily living. and various insurance products.microfinance programs send a strong message to households and communities. payment and remittance services. the potential market of microfinance clients also expands.
weddings. and. school fees. in many contexts. 15 . can drive a family so much deeper into poverty that it can take years to recover. theft. microfinance plays an important role in the fight against the many aspects of poverty. and reduce their vulnerability to external shocks. 3. they face the same series of sudden demands for cash we all face: illness. Recent research has revealed the extent to which individuals around the poverty line are vulnerable to shocks such as illness of a wage earner.investing in assets. need to expand the dwelling.). burial. for example. especially women. Moreover.2 How does microfinance help the poor? Microfinance brings the power of credit to the grassroots by way of loans to the poor. etc. After all. income generation from a business helps not only the business activity expand but also contributes to household income and its attendant benefits on food security. or other such events. who. to become economic agents of change. for women. that can be easily exchanged to cash in the future (gold jewelry. are secluded from public space. etc. Poverty is multi-dimensional. building materials.3. domestic animals.3 Aren't the poor too poor to save The poor already save in ways that we may not consider as "normal" savings--. absent effective financial services. build viable businesses. For instance. Experience shows that microfinance can help the poor to increase income. It can also be a powerful instrument for self-empowerment by enabling the poor. without requirement of collateral or previous credit record. By providing access to financial services. transacting with formal institutions can also build confidence and empowerment. weather. These shocks produce a huge claim on the limited financial resources of the family unit. children's education.
Or.These informal ways that people save are not without their problems. These savings services must be adapted to meet the Poor’s particular demand and their cash flow cycle. Most often. and with certain types of clients. As we are finding out. They care less about the interest rates that they can earn on the savings. "microfinance" still refers to micro credit. But the fact of the matter is that in most people's mind. remittances from abroad. Thus. the poor not only have low income. loans. and especially extremely poor. and other products. but also irregular income flows. Micro credit is only useful in certain situations. It is hard to imagine that there would be any family in the world today for which some type of formal financial service couldn't be designed and made useful. insurance. This represents an important challenge for the microfinance industry that has not yet made a concerted attempt to profitably capture tiny deposits. 3. since they are not used to saving in financial instruments and they place such a high premium on having savings readily available to meet emergency needs and accumulate assets.4 When is microfinance NOT an appropriate tool? Microfinance increasingly refers to a host of financial services—savings. institutions must provide flexible opportunities--. these may not be readily available when the woman needs them. to maximize the savings propensity of the poor. clients exclude themselves from micro credit as it is 16 . if a poor woman has loaned her "saved" funds to a family member in order to keep them safe from theft (since the alternative would be to keep the funds stored under her mattress). a great number of poor. The poor need savings that are both safe and liquid.both in terms of amounts deposited and the frequency of pay ins and pay outs. It is hard to cut off one leg of a goat that represents a family's savings mechanism when the sudden need for a small amount of cash arises.
As currently designed. and often significant payments from poor families. Even though a family may have a significant income for extended periods. thereby reducing its ability to enter into the type of commitment demanded today by most MFIs. it is often expected to respond to these situations where whole classes of individuals have been “made poor”. and significant income. Often time’s governments and aid agencies wish to use microfinance as a tool to compensate for some other social problem such as flooding. recent graduates from vocational training. This is simply unrealistic. some of these are working to incorporate plans to help “graduate” recipients to microfinance programs. Micro credit programs directed at these types of situations rarely work. relocation of refugees from civil strife. micro credit requires sustained. These extremely poor people at the bottom percentiles of those living below the poverty line need safety net programs that can help them with basic needs. the very cause of poverty is the lack of a sustained. or have incomes that are too undependable to enter into today's loan products. it may also face months of no income. and redundant workers who have been laid off. Running a program with substantial default rates undermines the very notion of credit and destroys credit discipline among those who could repay promptly but who look foolish given that many do not. Extremely poor people who do not have any stable income—such as the very destitute and the homeless—should not be microfinance clients. regular. Credit requires a 98% “hit” rate to be successful. At some level. Some people are just too poor.currently designed. Micro credit serves best those who have identified an economic opportunity and who are in a position to capitalize on that opportunity if they are 17 . regular. as they will only be pushed further into debt and poverty by loans that they cannot repay. Since micro credit has been sold as a poverty reduction tool. This means that 98% of recent vocational school graduates or returning refugees would need to be successful in establishing a micro enterprise for repayment rates to be high enough to allow for a program's overall sustainability.
or non-profit companies. 4. public trusts. 350billion and of that. The universe of potential clients expands exponentially however.provided with a small amount of ready cash.1 Formal Sector The formal sector comprises of the banks such as NABARD. 18 . Thus. and capacity. Types of Organizations and Composition of the Sector Microfinance providers in India can be classified under three broad categories: formal. and informal. There are over 500 non-government organizations (NGOs) registered as societies.2 Semi . who have demonstrated an ability to undertake the proposed activities in an entrepreneurial manner. They primarily provide credit for assistance in agriculture and microenterprise development and primarily target the poor. semiformal. Their deposits at around Rs. They charge an interest of 12-13. are the best candidates for micro credit. compulsory savings and costs incurred for payments to animators/staff/local leaders etc) they come out to be as high as 21-24%.formal Sector The majority of institutional microfinance providers in India are semi-formal organizations broadly referred to as MFIs and SGHs. those poor who work in stable or growing economies. Registered under a variety of legal acts. 4. these organizations greatly differ in philosophy. around Rs.5% but if we include the transaction costs (number of visits to banks. size. 250billion has been given as advances. SIDBI and other regional rural banks (RRBs). once we take into account the broader concept of “microfinance”. 4. and who have demonstrated a commitment to repay their debts (instead of feeling that the credit represents some form of social re-vindication).
from an industry perspective. since they are engaged in supplying financial services to the 19 .4 What are MFIs and SGHs? Quite simply. perhaps even a majority. ones that employ the newest lending techniques to generate efficient outreach that permit them to reach down far into poor sectors of the economy on a sustainable basis. a microfinance institution is an organization that offers financial services to low income populations. While estimates of their importance vary significantly. Yet. Most of these constitute a group that is commonly referred to as "best practice" organizations. the world over. cooperatives.4.3 Informal Sector In addition to friends and family. an NGO that is fully and virtually exclusively dedicated to offering financial services. not from the general public. Almost all of these offer microcredit and only take back small amounts of savings from their own borrowers. credit unions. it is undeniable that they continue to play a significant role in the financial lives of the poor. and subsequently microfinance. Within the microfinance industry. in most cases micro credit NGOs are not allowed to capture savings deposits from the general public. moneylenders. for example. The image most of us have when we refer to MFIs is of a “financial NGO”. private commercial banks and non-bank financial institutions (some that have transformed from NGOs into regulated institutions) and parts of state-owned banks. 4. and traders constitute the informal sector. A great many NGOs that offer microcredit. These groups of a few hundred NGOs have led the development of microcredit. the term microfinance institution has come to refer to a wide range of organizations dedicated to providing these services: NGOs. do many other non-financial development activities and would bristle at the suggestion that they are essentially financial institutions. landlords.
In both cases. when people in the industry refer to MFIs.. we call them MFIs.poor. we refer to them as MFIs. outstanding in crores. For our purposes. Year 2001 2002 2003 2004 2005 Outreach 3 10 11 37 67 Outstanding 64 215 327 433 1095 Client outreach in lakhs. These institutions tend to have a broader client base than the financial NGOs and already consider them to be part of the formal financial sector. It varies from country to country. They agree to save regularly and convert their savings into a Common Fund known as the Group corpus. they are referring only to that part of the institution that offers microfinance. The members of the group agree to use this common fund and such other funds that they may receive as a group 20 . How MFIs are doing Growing faster than SGHs. There are other institutions. however. but many poor people do have some access to these types of institutions. Others are owned and managed by local entrepreneurs or municipalities. SELF HELP GROUPS (SHG) is group of rural poor who have volunteered to organize themselves into a group for eradication of poverty of the members.. Some are membership based such as credit unions and cooperative housing societies. The same sort of situation exists with a small number of commercial banks that offer microfinance services. These are community-based financial intermediaries. although they tend not to reach down market as far as the financial NGOs. that consider themselves to be in the business of microfinance and that will certainly play a role in a reshaped and deepened financial sector. even though only a small portion of their assets may actually be tied up in financial services for the poor.
However. participation by the members in the decision making process. Further. A person should not be a member of more than one group. hills and areas with scattered and sparse population and in case of minor irrigation and disabled persons. Assistant Group Leader or Treasurer) of the Group. The group should be able to collect the minimum voluntary saving amount from all the 21 . if necessary. This should be in the form of regular meetings (weekly or fortnightly). in difficult areas like deserts. However. where essentially required. This will help the families of occupational groups like agricultural laborers. up to a maximum of 30% of the members in a group may be taken from families marginally above the poverty line living contiguously with BPL families and if they are acceptable to the BPL members of the group. However. or who may have been excluded from the BPL list to become members of the Self Help Group. The group should be able to draw up an agenda for each meeting and take up discussions as per the agenda. Generally all members of the group should belong to families below the poverty line. functioning in a democratic manner. The group formation will keep in view the following broad guidelines: Generally a self-help group may consist of 10 to 20 persons. The group shall not consist of more than one member from the same family. a maximum of 20% and in exceptional cases . which should not ordinarily be entirely in the hands of APL families.through a common management. the APL members will not be eligible for the subsidy under the scheme. APL members of the Self Help Group shall not become office bearers (Group Leader. marginal farmers and artisans marginally above the poverty line. allowing free exchange of views. this number may be from 5-20. The group should devise a code of conduct (Group management norms) to bind itself. The members should build their corpus through regular savings. The BPL families must actively participate in the management and decision making.
The members in the group meetings should take all the loaning decisions through a participatory decision making process. fix repayment schedules. The group should maintain simple basic records such as Minutes book. however. a group may comprise of persons with diverse disabilities or a group may comprise of both disabled and non-disabled persons below the poverty line. General ledger.in bank loans 22 . The group should be able to priorities the loan applications. 2994 cr.39 lakh SGH received Rs. 50% of the groups formed in each block should be exclusively for the women. Cash book. so as to deposit the balance amounts left with the groups after disbursing loans to its members. The group should operate a group account preferably in their service area bank branch. in case sufficient number of people for formation of disability-specific groups are not available. In the case of disabled persons. the groups formed should ideally be disability-specific wherever possible. The group should develop financial management norms covering the loan sanction procedure. Growing but not fast enough In 2005. The savings so collected will be the group corpus fund. repayment schedule and interest rates. fix appropriate rate of interest for the loans advanced and closely monitor the repayment of the loan installments from the loaned. Bank passbook and individual passbooks. Loan ledger. 5. The group corpus fund should be used to advance loans to the members.members regularly in the group meetings. These could be used with necessary changes/ modifications wherever required. The sample Performa for maintenance of above records by the group is in the Annexure II for guidance. Attendance register.
023 691 332 27.731 41 1.97.) of which.02.574 62.019 49.39.365 49 2.005 32.919 22.20.391 29 1.SGH financed during the year rate of growth of loans to new SGHs (%) No.58.660 2005 5.855 1.130 2006 6.502 36 4.330 2.669 40 1.71.215 2003 2.44.) Source:. Crore SGH and MFI are primary resource of lending the poor in rural area 23 .653 32 41.425 2004 3.NABARD 2002 1.55. disbursed as new groups of which.61. crore 5000 4000 3000 2000 1000 0 2001 2002 2003 Year 2004 2005 SGHs MFIs YEAR 2001 2002 2003 2004 2005 SGHs 500 1000 1500 2700 4750 MFIs 100 200 300 500 1200 Source: Sa-Dhan Figure are outstanding loans in Rs.994 1.158 698 32.268 32.013 40.109 15 3.960 Figure are outstanding loans in Rs. of SGH.092 32 2.169 37.727 1.882 29 1. Receiving repeat loans Proportions of repeat loans in total loans(%) Bank loans disbursed during the year (cr.499 2. disbursed as repeat loans Average loan size-new (Rs) Rrepeat loans (Rs.413 17 545 453 92 22.
They simply aren't sustainable. etc. for example. the institution then depends on permanent subsidy. Evidence shows that clients willingly pay the higher interest rates necessary to assure long term access to credit. it might represent 25% of the value of the loan amount. and access to liquidity and capital can enable the poor to obtain higher returns. especially if other microcredit operations have shown that they can provide credit and grow on the basis of “high” rates of interest—and along the way serve far greater numbers of clients.000 one thus increasing per unit transaction costs. Many do. and force the institution to charge a “high” rate of interest to cover its cost of loan administration. requires the same personnel and resources as a $2. Many of the economic activities in which the poor engage are relatively low return on labor. or to take advantage of 24 . Why do MFIs charge such high interest rates to poor people? Providing financial services to poor people is quite expensive. evaluate creditworthiness on the basis of interviews with the client's family and references.) or simply no access to credit—are much less attractive for them. However. follow through with visits to reinforce the repayment culture.6. and seldom grow significantly. especially in relation to the size of the transactions involved. This is one of the most important reasons why banks don't make small loans. They recognize that their alternatives— even higher interest rates in the informal finance sector (moneylenders. Loan officers must visit the client's home or place of work. Subsidy-dependent programs are always fighting to maintain their levels of activity against budget cuts. A $100 dollar loan. Interest rates in the informal sector can be as high as 20 percent per day among some urban market vendors. The microfinance institution could subsidize the loans to make the credit more "affordable" to the poor. While that might not seem unreasonable in absolute terms. It can easily cost US$25 to make a micro loan. and in many cases.
which take away the advantage to the borrower of the interest rate subsidy.economic opportunities. and if microfinance institutions offer credit on a more accessible basis. The return received on such investments may well be many times greater than the interest rate charged. and lower borrowing costs. Data from the Micro Banking Bulletin reports that 63 of the world's top MFIs had an average rate of return. substantial costs in terms of time. travel. increasing the time and money s/he must put out to get the loan. can be reduced. MFIs must continue to work to improve efficiency levels. A long series of studies has shown that many programs that charge subsidized interest rates end up using rationing mechanisms to distribute credit in response to excess demand. 7. after adjusting for inflation and after 25 . etc. paperwork. the interest rate is only a small part of their overall transaction cost of credit. These mechanisms cause the borrower to have to “jump through hoops”. thus benefiting the poor. Moreover. these transactions costs are frequently higher than the interest costs. and to increase scale. However. Can microfinance be profitable? Yes it can. better access to loans. and the benefits transferred to the poor in terms improving loan products. while increased access to credit for the poor on a long term and sustainable basis can bring significant benefits. In fact. This will bring down the cost of providing loans.
after all.5% of total assets. massive growth in the numbers of clients can be achieved. This is the “crowding out” effect. Yet. This compares favorably with returns in the commercial banking sector and gives credence to the hope of many that microfinance can be sufficiently attractive to mainstream into the retail banking sector. of about 2. MFOs’ confident claims to be having a wider 26 . and if they commit to that path. It is interesting to note that while the programs that reach out to the poorest clients perform less well as a group than those who reach out to a somewhat better-off client segment. Others worry that an excessive concern about profit in microfinance will lead MFIs up-market. the wider impacts of microfinance are notoriously difficult to identify or assess. poor. to serve better off clients who can absorb larger loan amounts. we have every reason to expect that programs that reach out to the very poorest microclients can be sustainable once they have matured. there are a great number of very poor. The evidence supports this position. managers of leading MFIs are seeking ways to dramatically increase operational efficiency. 8. Impact of microfinance over poverty There is increasing emphasis on the significance of the wider impacts of microfinance – those beyond the immediate financial and social benefits for the individual. Many feel that once microfinance becomes mainstreamed. Often. and vulnerable non-poor who are not reached by the banking sector. More and more MFI managers have c o m e to understand that sustainability is a precursor to reaching exponentially greater numbers of clients. their performance is improving rapidly and at the same pace as the programs serving a broad-based client group did some years ago.taking out subsidies programs might have received. Given this. This may happen. In short.
♦ On clients’ participation in social and political processes. ♦ through production linkages: an expansion of livelihoods (agricultural or otherwise) induced by micro-finance will support the formation of rural industries and services. 9.impact and to be able to assess these impacts are based on weak. circumstantial evidence. which reflects processes of microfinance more faithfully.financing in India 9. such as private moneylenders.1 Indian Economy and Microfinance 27 . Here we consider ways in which building evidence of wider impacts may be approached. of goods consumed by poor people. households other than those of borrowers will benefit. Current Scenario of Micro . and hence a cheapening in the price. Wider impacts may occur in the following ways: ♦ through the labour market: poor people taken on by expanding microfinance borrowers may as a consequence be taken upward across the poverty line. ♦ through the capital market: the intervention of a micro-finance institution may make existing lending institutions in the market. ♦ through the markets for goods consumed by poor people: if microfinance induces an increase in supply. lower their interest rates to compete. and help to bring about income changes among non-borrower households. including the intended and unintended consequences of microfinance operations. with beneficial effects on borrowers from institutions other than the one being studied. on social relations within households and neighborhoods.
India's GDP ranks among the top 15 economies of the world. 04) Total outstanding of all microfinance initiatives in India estimated to be Rs. India constitutes approximately one sixth of the world’s total population. 5000 crores.000 crores. the segment of the rural population above the poverty line but not rich enough to be of interest to the formal financial institutions also does not have good access to the formal financial intermediary services. of which some 80 percent is met by informal sources.1 billion people as of 2007.(Mar. Additionally. It is further estimated that of these households. • Cumulative disbursements under all microfinance programs is only about Rs. Annual credit demand by the poor in the country is estimated to be about Rs. including savings services. around 300 million people or about 60 million households are living below the poverty line.Home to about 1. • • 28 . However. only about 20 percent have access to credit from the formal sector. A group of micro-finance practitioners estimated the annualized credit usage of all poor families (rural and urban) at over Rs 45. Due to its large size and population of around 1000 million. 1600 crores. It is the world’s largest democracy and a key emerging market alongside China and Brazil. This figure has been extrapolated using the numbers of rural and urban poor households and their average annual credit usage (Rs 6000 and Rs 9000 pa respectively) assessed through various micro studies. 60. The picture of growing GDP and rising foreign investments shows an environment where wealth is increasing for the nation.000 crores. • • • Estimated that 350 million people live Below Poverty Line This translates to approximately 75 million households. (March 04) Only about 5 % of rural poor have access to microfinance.
2500. and the sustainability of operations. 2. 70 % of the rural poor do not have a deposit account 87 % have no access to credit from formal sources. 29 . Lack of an appropriate legal vehicle 2. the total outstanding is estimated to be only about Rs.• Though a cumulative of about 20 million families have accessed microfinance to the extent of Rs. This is due to. • • • • About 56 % of the poor still borrow from informal sources. Unfavorable policies like caps on interest rates which effectively limits the viability of serving the poor. High transaction costs 3. Limited access to equity 3. 5000 crores. • While MFIs have shown that serving the poor is not an unviable proposition there are issues that have constrained MFIs while scaling up. While 10 % lending to weaker sections is required for commercial banks. Less than 15 % of the households have any kind of insurance. The active borrowers are estimated to have a per capita outstanding of only Rs. they neither have the network for lending and supervision on a large scale nor the confidence to offer term loans to big MFIs. 1600 crores. Difficulty in accessing low cost on-lending funds (as of now they are unable to offer savings services in a legitimate manner. 1. MIS. • Limited access to Capacity Building support which is an important variable in terms of quality of the portfolio. inter-aria. These include. the following reasons • • • • 1. Bankers feel that it is fraught with risks and uncertainties. Considerable gap between demand and supply for all financial services Majority of poor are excluded from financial services. The non poor comprise of 29 % of the outreach.
total credit demand ranges between Rs.4 %) and crop insurance (0. • On the other hand.000 in rural areas and Rs. particularly to small. and by far has been for investment purposes (13%) and more for family emergencies (29%) and social expenditures (19%). thus reducing the volumes of such credits.000 in urban settings. However. 500 billion. only Rs.2 %). 2. informal credits have been attractive although high interest rates due to: • • • Flexible repayment options Convenience and frequency with which such loans can be accessed Less reliance on collateral (only 16. • High fiscal deficits have meant that Government is appropriating a large share of financial savings for itself. 6. 9. With 75 million poor households potentially requiring financial services. Estimates of household credit demand vary from a minimum of Rs. Persisting interest rate restrictions reduce the attractiveness of lending. rural clients. the microfinance market in India is among the largest in the world.• Negligible numbers have access to health insurance (0. The reason for this is that major portion for rural crediting has been from the informal sector and this is at a very high interest rate.18 billion of this amount has been generated so far.5% of households report providing collateral against the loan) 30 .000 to Rs. Given that 80 percent of poor households are located in rural areas. There are a number of factors why rural crediting by the formal sector has not taken pace so far. 255 billion and Rs.
In urban areas. and subsidized micro enterprise credit is still relatively rare when compare to its rural counterpart. and agricultural banks to move microcredit. including credit programs for the disadvantaged. governments are tempted to use savings banks. Many governments have set up apex facilities that channel funds from multilateral agencies to MFIs. Short term political gain is just too tempting for politically controlled lending organizations. Until recently. Twenty years of insightful critique of rural credit programs revealed that governments do a very bad job of lending to the poor. Now that microfinance has become quite popular. development banks.9. unless the government has a clear acceptance of the need to avoid the pitfalls of the past and a clear means to do so. governments never really got into the act. they disburse too quickly (and thoughtlessly) and they collect too infrequently (unwillingness to be tough on defaulters). Apex facilities can be quite complicated and there are few successful examples in 31 .2 What is the government’s role in supporting microfinance? Governments have a complicated role when it comes to microfinance. This is not generally a good idea. postal savings banks. governments generally felt that it was their responsibility to generate development finance'.
06) financing needs . Successful apex organizations in microfinance tend to be built on the backs of successful MFIs.June 07) Microfinance Services . 9. governments can also get involved in microfinance by concerning themselves with the regulatory framework that impinges on the ability of a wide range of financial actors to offer financial services to the very poor.microfinance.3 Microfinance and Capital Requirement The demand situation in the microfinance market can be gauged from the Table At a Glance: Scale of Indian Microfinance Population of India (estimate . help them invest in and benefit from their skill sets and tide over the impact of adverse shocks in the process.129 million 350 million 40 million 50% USD 2 billion USD 7 billion Given these figures there is need for broad basing the reach of financial services to the people falling in the low income category. 32 . The new commercial banks do not have the infrastructure to ensure the last mile connectivity and have to rely heavily of microfinance institutions (MFI).4 year estimate (Sept. 06) Table 2: Demand for micro-lending in Indian Source: Microfinance India (MFI) 2007 1. This topic is treated below. The intentions might sound quite philanthropic however microfinance is turning out to be a profitable market for commercial banks which is quite evident from their presence in this area.potential client outreach Microfinance Services . Finally. 06) Annual growth in Microfinance Services Microfinance loan portfolio (Mar. not the other way around.current client outreach (Mar.
the total revenue from delivering one hundred loans worth $1. and often 33 . Banks must incur substantial costs to managing a client account. 9.4 Challenges in the Indian context Traditionally banks have usually not provided financial services to clients with little or no cash income. high volume and cash intensive nature of the business and the high fixed and variable costs associated with putting in place the physical infrastructure required to broaden the reach. even if they happen to own land in the developing world. The MFIs have begun to graduate from grant based organizations to capital based organizations. The presence of high transaction costs is compounded by the fact that MFIs are not capital rich. Equity and Securitization came forth as good methods of sourcing capitals for the microfinance initiatives. it has long been accepted that the development of a healthy national financial system is an important goal and catalyst for the broader goal of national economic development.000. For example. A similar equation resists efforts to deliver other financial services to poor people. In addition. they may not have effective title to it. There is a break-even point in loan and deposit sizes below which banks lose money on each transaction they make. However. national planners and experts focus their attention mainly on developing a commercial banking sector dealing in high-value transactions. This means that the bank will have little recourse against defaulting borrowers.MFIs face the impediments of high cost of service associated with the lowvalue.000 each will not differ greatly from the revenue that results from delivering one loan of $100. Seen from a broader perspective. regardless of how small the sums of money involved. But it takes nearly a hundred times as much work and cost to manage a hundred loans as it does to manage one. As documented extensively by Hernando de Soto and others. Poor people usually fall below it. most poor people have few assets that can be secured by a bank as collateral.
neglect the delivery of services to households of limited means. Hopes of quickly putting them out of business have proven unrealistic. their services are convenient and fast. and they can be very flexible when borrowers run into problems. Moneylenders often charge over 10% a month. Because of these difficulties. meeting the operating costs of a retail branch by serving nearby customers has proven considerably more challenging. continue to have no practical access to formal sector finance. In nations with lower population densities. especially in the rural areas. even in places where microfinance institutions are very active. even though these households comprise the large majority of their populations. adapt and grow. While they often demonized and accused of usury. Ability to innovate. Although much progress has been made. Appropriate loan products for different segments. Design of apt MIS including user friendly software for tracking accounts and operations. the problem has not been solved yet. and the overwhelming majority of people who earn less than $1 a day. 34 . or even a few percentage points 'a day' for their money. Ability to attract and retain professional and committed human resources. when poor people borrow they often visit their relatives or the ubiquitous local moneylender. • • • • • • • Appropriate legal structures for the structured growth of MF operations Finding adequate levels of equity for the new entities to leverage loan funds Ability to access loan funds at reasonably low rates of interest.
Current Situation of Microfinance and important issues In Rajasthan. as against Rs. 7486 for the country. have 35 . There are approximately 1. per capita bank credit in Rajasthan is Rs. Ability to train trainers. This is reflected in the number of bank outlets per lakh population. Capacity to provide backward linkages or create support structures for marketing. Department of women and child development has promoted about 50% of these groups. In terms of availability of credit from RFI the state is among the least privileged states.• • • • Bring out a compendium of small and micro enterprises for the MF clients. per capita bank deposits. microfinance is almost synonymous with Self Help Groups. social and economic features of Rajasthan define the need and scope for a strong microfinance movement. Identify and prepare a panel of locally available trainers. Status of microfinance in Rajasthan Background Rajasthan is the largest state in India and the peculiar natural. Watershed Development etc. per capita bank deposit in Rajasthan is Rs 6151. Overall bank penetration is also low.5 lakh self help groups of women. 10. Other government departments under developmental schemes like SGSY. As per the Human Development Index. per capita bank credit and. For example. 12922 for the country as a whole. as against Rs. Rajasthan comes at 12th rank among 15 major states in India. with 2/3rd of the population dependent on agriculture and allied activities for their livelihoods. over all credit deposit ratio. The primary sector dominates the essentially agrarian economy. 3355. In all these respects Rajasthan is lagging. There is no other model of mF in the state.
galicha. agarbatti. their status in family and society would be better. badi. papad. Need of financial services: It has been well researched and documented that poor have temporary surpluses and they are in need of services to keep their savings safe. The money received from such transactions would have small temporary surplus. It is probably a case of ‘Double Fault’ First pushing poor to become entrepreneur and that too in a collective way.organized another 20-25% group. Most development practitioners and policy makers realized that mere women participation through MM/MS is not adequate and some direct action in terms of improving economic status of women is needed. But participation of women in these VDCs was sub optimal. handicrafts. dari. So they started a separate group of women ‘Mahila Smooh/ or Mahila Mandals’ as subset of larger village institution purely with a purpose of having increased participation of women in development. The Self Help Movement started more as ‘social mobilization’ of women for their better place in family and society rather than ‘microfinance movement’ in Rajasthan. Many voluntary organizations had been working with poor organizing them in ‘village development committees’. If 36 . The assumption was that if women have access to income/money. etc. candle. A poor family may get the payment for their labour or they sell their small assets or crops etc. no significant impact is seen. chalk. Except some success stories at highly micro level. Many voluntary organizations and government (together and/or separately) started organizing women in to groups to take up small business (IG Activities) collectively. But due to lack of proper marketing networks and many other reasons. which they would use over next few days/ months. NGOs have promoted remaining 25-30% groups. there was mixed experience. achar. Most of these activities were Off Farm like sewing.
they do not have access to a place where they can save that safely. small assets Big assetstractors. Loan Size Consumption loans up to Rs. 25. traders More than Rs.000/- Source of Credit Money lenders. PACS. SHPIs Scheme/ Project Remarks 37 . Preliminary Observations on Credit Needs of Rural People Category Very Poor Description Poor Landless. 2. Coop Banks. relatives Average SHG. 10. Single women HH. Poor Money lenders. 2000/Consumption and productive loans up to Rs. HH consumption Food. to pay old loans.00. health. marriage and other social obligations. permanent/ semi permanent job holders. they keep the money in cash and it does not earn any interest. moneylenders Better off Large farmers. to advance loans. Clothes. friends. Migrants Small and Marginal Farmers. Banks.000/Productive loans up to Rs. No.000 Commercial Banks. shopkeepers Credit For Food. SC/ST. agro inputs. SHGs. it might result in to expenses on less critical items or even on things like drinking etc. It has been noticed that due to lack of access to banks or SHGs. vehicles. may be up to Rs.000 loans. Traditional services trades Medium farmers. Coop SHG Status: Major SHPIs: Sr. Illness. equipments Working capital. 25.
Department of Women and Child Development Department of Rural Development NABARD and Banks ICDS 2.18 Refinance (Rs.61 6723.1. Lakhs) 2184.309) Of these 11212 SHGs are women SHGs. SHGs passed grade-I are 13951 and SHGs passed Grade-II are 4372 Groups taken up economic activities (entrepreneurship) are 2873 of which 192 are women SHGs SHG Bank Linkage: (From NABARD) Year 2002-03 2003-04 2004-05 2005-06 (till Nov. 4.52 Department of Women and Child Development (DWCD): (till October 2005) 38 .12 2587. of SHG Credit Linked 22742 33846 59906 79584 Loan amount (Rs. Lakhs) 1472.through NGOs A few RRBs Through NGOs Voluntary Organizations With support from Donor agencies and government programs Under SGSY: (from Department of Rural Development.77 924. 05) Nos. total 26263 SHGs have been organized.28 992.28 4344. (Max in Dungarpur-3636 and Min in Dholpur.13 2864. 3. SGSY Watershed Development Programs SHG-Bank Linkage Groups are organized by Anganwadi workers and sathins BPL groups.Till November 2005) • • • • Till November 2005.
Total SHGs formed:
100424 (Max 10269 in Jaipur and Min 623 in Jaiselmer)
Total savings in the groups: Nos. of Groups taken loan from banks:
Rs. 4633.78 Lakhs 38138 (Max 3994 in Bhilwara and Min 28 in Rajsamand)
Amount of loan taken from banks: Nos. of groups engaged in IG activities:
Rs. 7182 Lakhs 5926 (in 23 districts)
Voluntary Organizations: In every district, there are about 5-10
voluntary organizations that are organizing SHGs either on their own or in collaboration with government. Most of the voluntary agencies have promoted 50 to 100 SHGs. However there are a few agencies that have substantial number (300 to 800 SHGs) of groups. For example: PEDO in Dungarpur, Lupin Foundation in Bharatpur, PRADAN in Dausa, Dholpur, IBTADA in Alwar, ASSEFA in Baran and Banswara, URMUL in Bikaner, Sewa Mandir in Udaipur, Navyuvak Mandal and Bhoruka Charitable Trust in Churu, and a few others.
District Poverty Initiative Project (DPIP): in 7 districts (Churu,
Baran, Dholpur, Dausa, Jhalawar, Rajsmand and Tonk): Under DPIP more than 20,000 common interest groups (CIG) have been formed. Though as per the project norms these groups are supposed to function as SHGs but these groups are working as ‘activity groups’. Very few groups are doing regular savings and inter loaning. Lately efforts are being made to transform CIGs in to SHGs.
Credit Cooperative Structure: There is a formal cooperative structure
to extend credit to farmers. As of 30th June 2003, the recovery rate at the apex level is 95.46%, at the DCCB level it is 77.24%, and at the PACS level it is 62.75%. The financials often do not reflect the true picture. Short-term
agricultural loans, for example, are converted into medium term loans, once they fall overdue. They are then not part of the current or overdue demand of the PACS, and this helps the PACS report better recoveries than have actually been achieved. The total membership of all PACS in Rajasthan is 4.59 million persons, as of 2001-02. The PACS were envisaged to cover in their fold all agricultural families in the villages. The average share of members that currently borrow from PACS across Rajasthan was at 37% in 2002-03.
Microfinance and Livelihood: The share of agriculture and allied
activities in to GSDP is reducing and people engaged in primary sector are also looking for employment in wages and in non-farm sector. On an average a person need around Rs. 10-15,000/- for initiating a micro enterprise. It is difficult for these people to get the credit from formal institutions. As they do not have assets to offer as collateral, informal sources (moneylenders) also do not give them the credit. Many of these people end us as wage earners.
The major issues that need to be addressed are:
1. Access of poor to formal financial institutions 2. Quality of the existing Self Help Groups- only 30% SHGs have been Able to take Loan from Banks 3. Spread of the movement: About 80% of SHGs are located in 30% of The districts 4. Outreach: Large number of poor is still beyond the reach of SHGs and Formal financial institutions
5. Microfinance is limited to micro savings and credit.
6. Human resource challenge: Perspective and capacities of mf promoters
is very Limited, Numbers of skilled persons in microfinance is very less
7. Most mf products and services offered are pre determined and they
are not based On the needs of the clients 8. There is double reporting (same group being reported by different SHG Promoters), There are also cases where one person is member of many groups. 9. Largely the SHGs are promoted to meet project requirements/ targets 10. Still there are many operational problems in SHG-Bank linkage 11. Inadequate financial support so far on SHG formation, it needs at least 3 years, and about Rs.8-10, 000/- per SHG for promoting a good quality SHG.
11. Microfinance for Women in India
Overview In 1980s, microfinance programs have improved upon original methodologies and extended beyond conventional thinking. First, microfinance demonstrated that poor people, and especially women, had excellent repayment rates (and often, rates that performed better than those in formal financial sectors). And second, that the poor were willing and able to pay interest rates that would allow the microfinance institutions (MFIs) to cover costs. Microfinance A type of banking service that is provided to unemployed, lowincome individuals or groups who would otherwise have no other means of
It is a tool for empowerment of the poorest. Ultimately. microfinance institutions must charge their lenders interests on loans.it does not spring from market forces alone . the lower the incremental benefit from further equal doses of micro-credit is likely to be. specially for women . 1. 4. It is essentially for promoting self-employment. Although most modern microfinance institutions operate in developing countries.generally used for (a) direct income generation (b) rearrangement of assets and liabilities for the household to participate in future opportunities and (c) consumption smoothing.this is what makes it acceptable as a valid goal for public policy. but a tool for social change.there is a public interest in promoting the growth of micro finance .it is potentially welfare enhancing . Delivery is normally through Self Help Groups (SHGs). Like conventional banking operations.micro finance increases the productivity of self-employment in the informal sector of the economy . Micro financing is not a new concept. While these interest rates are generally lower than those offered by normal banks.gaining financial services. the opportunities of wage employment are limited in developing countries . some opponents of this concept condemn microfinance operations for making profits off of the poor. Small microcredit operations have existed since the mid 1700s.more than 90% of loans are repaid. borrowing money and insurance. the higher the income and better the asset position of the borrower. the rate of payment default for loans is surprisingly low . It is not just a financing system. 3. 2. 42 . the goal of microfinance is to give low income people an opportunity to become self-sufficient by providing a means of saving money.
In Africa. specially for women . It is a tool for empowerment of the poorest. the economy. In many cases. Because micro credit is aimed at the poorest.this is what makes it acceptable as a valid goal for public policy. This is a small example of the importance of women's work in society. women not only produce the food but market it as well. 6. women produce 80 percent of the food and in Asia 60 percent and in Latin America 40 percent. Women have always actively participated in their local economies.it does not spring from market forces alone . the higher the income and better the asset position of the borrower. especially in developing 43 . micro-finance lending technology needs to mimic the informal lenders rather than the formal sector lending. for example. and urban life. Since the late 1950s.1 Women's Role in Economy All over the world. It does not illustrate the real extent of women's contribution.it is potentially welfare enhancing . the lower the incremental benefit from further equal doses of micro-credit is likely to be. which gives them a well-developed knowledge of local markets and customers. It is not just a financing system. It has to: a) provide for seasonality (b) allow repayment flexibility (c) eschew bureaucratic and legal formalities (d) fix a ceiling on loan sizes. society. women's economic activities have been steadily increasing.there is a public interest in promoting the growth of micro finance . 11.5. but a tool for social change. the significant of women entry into the workforce over the past three decades has produced profound transformations in the organization of families.
labour markets have followed this perception and have offered less favorable conditions to women. Women workers consistently earn less than their male partners do. Due to cultural and traditional aspects. such as the psychological satisfaction of "social contact". in Africa all tasks related to a family's support are the responsibility of women. As a consequence of this reality. in some cases. up to 10 hours a day. a woman's presence has been a question of survival of her family. especially poor mothers. but at the end of the month. micro enterprises owned by women have been considered as a way to meet primary needs instead of a profitable source of income. their jobs have been considered as an "extra income" to family survival or simply to improve its living conditions. not only to the labour force. That is the case of Cameroon women who work. for example. and balancing all the demands. 11. must divide their time between work "productive role" and family "reproductive role". Moreover. but also their role as a significant income-source for the family. Women have had to fight against an adverse environment. their income is far below the Cameroon monthly minimum wage of 29000 CFA francs (US$ 60). In spite of the remarkable importance of women's participation. which traditionally had been minimizing and exploiting their capacities. Women. Time is valuable for these women. Unfortunately. as their livelihoods depend largely on their ability to fulfill the multiple demands of the household and the marketplace. women are just satisfied with the non-financial benefits.countries. For instance.2 Women and micro finance 44 .
lack of education and personal difficulties. These elements are: 45 . women have had less access to these services than men. few tools and equipment and rely on farm produce or inexpensive raw materials.Although men. Smaller amounts of investment capital effectively limit women to a narrow range of low-return activities which require minimal capital outlays. One of the most essential factors contributing to success in microentrepreneurship is access to capital and financial services. women need access to small loans (especially for working capital). for women and especially for poor women. legal barriers. simpler application procedures and improved access to saving accounts. Surveys have shown that many elements contribute to make it more difficult for women in small businesses to make a profit. In general. in some cases. and educational standards for families and consequently for the whole of society. women have barriers to overcome. women depend largely on their own limited cash resources or. loans from extended family members for investment capital. Research has shown that investing in women offers the most effective means to improve health. practical external barriers. credit for microentreprise development has been a crucial issue over the past two decades. a special support for women in both financial and non-financial services is necessary. Regarding limited-access to financial services. Among them are negative socio-cultural attitudes. hygiene. nutrition. In spite of this. Thus. microentreprise ownership has emerged as a strategy for economical survival. as well as women. innovative forms of collateral. For various reasons. frequent repayment schedules more appropriate to the cash flows of their enterprises. face difficulties in establishing an additional enterprise. In this context.
Setting prices arbitrarily. require very little start-up capital. Credit policies that can gradually run their business (many customers cannot pay cash. Lack of capital. One important element. Inventory and inflation accounting is never undertaken. These include fostering of other people's development through guiding. informal structures. Employment of too many relatives which increases social pressure to share benefits. Another interesting factor is their strong social coherence that allows them to maintain strong communications-channels at all levels. female-led microenterprises tend to be associated with activities that provide part-time employment. thus making the choice of business difficult. on the other hand. is the possibility to transfer "motherhood skills" to job. and perhaps the only characteristic that men will never have. monitoring. o o o o o o o 11. and in handling difficulties. they differ in social background. and little or no 46 . educational level. and sharing information. experience and age. They are small in size and have loose.o Lack of knowledge of the market and potential profitability. women's activities are very interesting as they offer a great source of knowledge and innovation. in organizing and pacing. High interest rates. Women are experienced in balancing claims. In general terms. suppliers are very harsh towards women).2. For example: there is no single type of female micro-entrepreneur. Inadequate bookkeeping.1 Women's Micro-enterprises Considering the entrepreneurial environment.
Their businesses are smaller than others. employing less than five employees. 'India and Bangladesh have no major difference in poverty.formal education. o o o o o o o o o 11. services. many women entrepreneurs in the developing world remain illiterate and live in poor rural communities.' the chief architect of Bangladesh's Grameen Bank told a conference organized by the Federation of Indian Chambers of Commerce and Industry (FICCI). And to make it successful. Business growth strategies are affected by household responsibilities.2 Women can make micro-credit succeed in India: 'India has to understand that micro-finance is workable and sustainable anywhere where there is poverty. They use traditional technologies. If micro- 47 . Women start their enterprises with less professional work experience and knowledge of their sector than their male counterparts. Most employees are family-related They are often home based. Businesswomen in developing and countries share the following general characteristics: o They are concentrated in market sectors that have low barriers to entry and low levels of outside communication (transfer to other markets). The owners have relatively little previous working experience. They focus on trade. Owners tend to have lower levels of education and literacy. On the other hand. it needs to emphasize and mobilize the role of women in each rural and poor household.2. and light manufacturing activities.
finance or micro-credit is successful in Bangladesh. 'The Grameen Bank and the work that we do is not something extraordinary and neither is it a model. 11. In general terms. 'Bangladesh is very close to achieving the UN millennium development goal of eradicating poverty. It is a rather simple way of solving the complex problems of poverty.' Yunus emphasized. Savings and credit programs should be designed in a way not to exclude women from participating. donors should: * Encourage micro enterprise programs to develop specific strategies for recruiting women as clients. there is a need to examine the impact of structural adjustment policies on men and women at the family level as well as within various subsectors of the labour market and within the small enterprise sector itself. from within their existing target groups.2. in order to facilitate the participation of women in micro and small enterprise. but it can come out with excellent results only if it catches the pace.' the 66-year-old economist said. it can be successful in India as well. And we have been able to successfully reach 80 percent poor households.’ India has a long way to go.' he reiterated. women's group associations and other grassroots organizations. Additionally. * Encourage micro enterprise programs to expand their target groups to include the sizes and types of enterprise activities in which women engage 48 .3 How to increase and support women's participation in microfinance activities? Both governments and donors should explore ways of developing innovative credit programs using intermediary channels or institutions closer to the target groups such as co-operatives.
and/or experiment with assistance strategies. If woman living in a rural area of a developing country. Investment in rural women pays off. For women. especially poverty-focused organizations active in rural areas. they are likely to be poorer than a man. * Consider expanding support to a broader range of organizations. Some rural women have been affected by trade liberalization they are unable to participate in the marketing of export crops as they lack land rights and access to essential farm inputs. business and technical assistance needs of these types of enterprises. own no land. Support for these organizations should include technical assistance and training in programs planning. management and in developing teams of female staff to assist clients in business planning and management. On the other hand.1% women and 51. be less educated and in poorer health. Struggling to combine a 'double day' of lowpaid work with care for the home.9% men * Female illiteracy is 62% whereas the male illiteracy rate is 34% * The labour force participation rate of women is 22.3 Rural Finance for Rural Women Poverty hits hardest at the female half of humankind.7%. less than half of the 49 . Seventy per cent of poor women in India cannot read or write. more vulnerable. perhaps the cruelest reality of all is that they have less chance than men to escape from poverty. some women have gained by securing jobs in new export activities. A rural woman is likely to have little or no say in the way the family spends its income. And you are unlikely to live as long. 11. Illiteracy often excludes people from written knowledge and decision-making. rural women often have to cope with frequent pregnancies and child mortality. * Indian population is 48. Discrimination in education is the start of the vicious spiral of poverty. A girl may be deprived of schooling and literacy for no other reason than that she is female.
half a billion rural women are poor and lack access to resources and markets. 500 million women live below the poverty line in rural areas.6% * In rural India. 11. Rural women from the backbone of the agricultural labour force across much of the developing world and produce 35-45% of Gross Domestic Product and well over 50% of the developing world's food. Yet. Women perform 30 per cent of the agricultural work in industrialized countries”.1 Rural Women at a glance Rural women comprise more than one quarter of the total world population.5% of the total female labour * Women have extensive work loads with dual responsibility for farm and household production * Women's work is getting harder and more time-consuming due to ecological degradation and changing agricultural technologies and practices * Women have an active role and extensive involvement in livestock production..3. Rural women the world over are an integral and vital force in the development processes that are the key to socio-economic progress.. forest resource use and fishery processing * Women contribute considerably to household income through farm and non farm activities as well as through work as landless agricultural labourers * Women's work as family labour is underestimated * There are high degrees of inter-state and intra-state variations in gender roles in agriculture." Rural finance and rural poverty 50 .men's rate of 51. agriculture and allied industrial sectors employ as much as 89. environment and rural production.
they try to optimize their possibilities of accessing credit from the various existing rural finance services: The "unofficial" system (an alternative established by community members) 51 . who live in precarious conditions. And even when they do have income or collateral. To overcome poverty. Consequently. shelter and food. with higher repayment rates than conventional borrowers. They are however often confronted with numerous obstacles when applying for credit. It puts credit. But with little income or collateral. receive remittances from relatives working abroad and safeguard their savings. where most of the world's poorest people live. insurance and other basic financial services within the reach of poor people. poor people can obtain small loans.More than a billion poor people lack access to the basic financial services which are essential for them to manage their precarious lives. threatened by lack of income. savings. save and invest. Need credit to rural women Rural women play a fundamental role in daily management of agricultural activities and of the family unit. and to protect their families against risk. they need to be able to borrow. poor people are seldom able to obtain loans from banks and other formal financial institutions. Through microfinance institutions such as credit unions and some non-governmental organizations. Records show that poor people are a good risk. the amounts they require are often too small to appeal to banks. Microfinance is one way of fighting poverty in rural areas. Good management of even the smallest assets can be crucial to very poor people. Accessing small amounts of credit at reasonable interest rates gives people with the willingness and know-how an opportunity to set up a small business.
Loans facilitates to rural women Loans play an important role in the economic. Various barriers arise when they try to undertake or develop any income-generating production activities. Additional sources of finance can help in developing necessary commercial agriculture within the national and international context.The "official" system (banks and other official financial institutions). Although rural women represent a fundamental pillar for survival and management of the family unit. they will be able to organize themselves more efficiently. Improving rural women's access to finance gives them a chance to become autonomous. This can contribute to increase agricultural productivity. shopkeepers supplying indispensable additional income. farmers producing food for the family. to participate in decision making processes and to draw up policies which concern them. They are also in charge of natural resources management which ensures future food security for their families. and Farmers' organizations which give loans to their members Rural women fulfill multiple functions on a daily basis: they are mothers providing for their family's well-being. to affirm their position as rural women farmers. 52 . they are confronted with real difficulties in accessing additional resources such as credit. and improved natural resource management. social and political improvement of the situation of women throughout the world. As a result they will be able to ensure food security for the future of which they are the guarantors. development of income-generating activities alongside their production activities. as well as defending their own interests with public authorities and other relevant institutions. whilst retaining subsistence farming for the community's daily needs. By increasing their economic power. better control of production methods.
The unofficial sector has always played an important part in financing rural women's activities. etc. gold jewellery. relatives or friends. the compulsory gift of a sum to a member of the family in difficulty. a livestock epidemic. The different players in this sector are families. medium-term and long-term unforeseen circumstances. natural weather phenomenon. herds.2 Sources of finance are available to rural women Women have several possible sources of finance at their disposal. Access to safe and secure savings is an important part of addressing shortterm. Rural women therefore insure themselves against future risks by saving in the form of land. to undertake other income-generating activities. foodstuffs sold cheaply because of the death or accident of a member of the family. each with its own advantages and disadvantages. etc) or completely unpredictable (food shortages. A new system of "semi-unofficial" micro-financing has also appeared during the last decade: the system set up by the non-government organizations which provide savings/loans to local rural and/or urban populations allowing populations who do not have access to the official sector to obtain loans at 53 . which also include risks such as theft. etc). 11. The loans are thus either in money or in kind (for example loans of inputs reimbursed by harvested agricultural produce). These savings allow them to protect their own funds and. or by hoarding money. rural shopkeepers.3. trees. private lenders including loan sharks. Allowing them to control their incomes and to be paid for these activities is to participate in granting autonomy to rural women.Savings facilitate for rural women Savings are seen as insurance against foreseeable future difficulties (constituting a dowry. bridging a difficult period. and rural solidarity arrangements. as a result.
It attempts to correct the negative aspects whilst retaining the main operational methods. We are including this finance model within the unofficial system as it was inspired from this system to better respond to the needs of the population. Savings/ Loans in the unofficial Finance sector Small farmers have always set up unofficial micro-finance systems. even before experts in the field of development made this one of its favorite themes. and as a function of their assessment of the risks they are taking in borrowing from the different finance systems. Whenever possible rural women use several savings/loans strategies simultaneously.rates which are much better than in unofficial systems. The official sector includes country's various official banks (national banks. At present. rural banks. These official finance institutions are dealt with in the second section of this document. the amounts they may consider necessary. these were only bartering systems. provincial and national level. Farmers' Credit Institutions exist alongside the systems mentioned above. depending on their requirements. To begin with. etc). their reimbursement capabilities according to redemption dates. Savings/loan systems can play an important role in avoiding the marginalization of rural women by their partial or total lack of integration into economic and marketing streams at the local. They are specific to farmers' organizations and take the form of agricultural loans/savings institutions and cooperatives which we will deal with in the third section. National economies are in the process of addressing the phenomenon of internationalization and its implications for the rural economy. before the 54 .
According to purely economic criteria. partly because unofficial systems imply limited capital and high costs which do not permit the development of large-scale activities. since there are numerous obstacles preventing access to the official credit system. Various obstacles to the unofficial finance system's efficiency Numerous studies. many people retain the unofficial system as a source of savings and loans even if this alternative has a number of negative implications. rural women are not integrated into the official finance system and their economic activities 55 . Finally. mainly carried out by universities and non-government organizations. by using the unofficial finance system. the unofficial sector is still today widely used and very useful for small producers and for rural women in particular. Apart from the development of community relationships. Although the loans are granted at high interest rates. the impact of loans is limited. there is virtually no remuneration for savings. Moreover. one of the possible negative points that can be noted is the social dependence which comes about due to the existing relationships with the person who has facilitated and/or made the loan. have highlighted obstacles in the unofficial savings/loans systems. Moreover the system usually lacks reliability through insecurity of deposits and the lender's more or less good management of his finance system. Despite the constraints of this system.unofficial finance system developed into proper loans which could be large sums of money.
Rural women are often considered as being insolvent because they are subsistence farmers.continue to be marginal. Official system: Finance Institutions The official system (public or private national banks. targeting mainly farmers. Its impact remains limited also because of the essential role of the personal relationships played in granting loans. In fact banks have a considerable communication problem with the rural environment in general. or development banks) can ensure more ambitious financial services than unofficial systems. facilitating access to loans could be a driving force in developing their production and processing activities. This means that rural women have a very limited idea of the nature of institutional savings/loans facilities. However. their activities remain on a small scale and cannot develop in a satisfactory manner. rural banks. 56 . using them may be difficult for rural women. and with women in particular. The unofficial finance system is interesting in that it constitutes recourse in the event of sudden difficulties. As rural women are increasingly in charge of the family farm's general management (rural exodus of men) and have to deal with the official finance system. and are seen as a high-risk population for finance institutions. Therefore. and in progressing towards agriculture for the local market. without worrying about the specific nature of female problems. The rare extension programs concern their operating and financial services. Obstacles preventing rural women's access to the official finance system Rural women have little access to information concerning official savings/loans institutions.
It is particularly complex for rural women to address the social practices of their communities and is a long-term challenge. rural women are discouraged from accessing these financial services. They are heavy institutional constraints such as administrative procedures and the necessity for guarantees (land ownership title deeds).Banks and financial institutions hesitate to grant loans to women. but also whenever they make a deposit. block their economic and social development. This is the case not only to open an account or ask for a loan. one must also add the social cost as many prejudices exist concerning rural women going to the town and the economic cost of their absence from their families with regard to their daily domestic tasks and production. or have a request. require information. but this necessitates organizing women inside the community and this is not yet common practice. with the result that they are kept in a state of dependency and daily insecurity. social taboos. as they are usually small loans and do not provide a good enough return for the banks. Perhaps the most difficult of obstacles to be cleared are those of a sociocultural nature. These include standards and social rules (including land rights and inheritance procedures). religious practices and cast systems. Agricultural organizations which provide Finance services 57 . Of course groups of women have a better chance of being provided with credit. Difficulties in accessing loans encountered by rural women reduce the scope of their initiatives. Lastly is the classical difficulty of all rural populations. prejudice against women and rural women in particular. To add to the cost in time and in transport. and not necessarily specific to rural women. Banks rarely have agencies in rural zones and women therefore have to go to towns which often mean walking for many hours. With the problems of illiteracy and the lack of management knowledge.
agricultural organizations are characterized by the fact that they are set up. technologies and training. Rural women's access to facilities provided by agricultural organizations A rural development program including financial services should associate these services with improved access to inputs. owned. 11. extension and information on credit facilities from agricultural organizations. land. managed and controlled by their members. technical.3. Agricultural organizations have multiple sectors of intervention and can set up genuine rural development programs. in particular with respect to finance granted to them. these should be adapted to the differences in men and women's knowledge. they can set up credit policies and programs which are better adapted to rural environments and to rural women when their voices are heard.Specialized in the rural sector's problems. social and cultural difficulties of this sector. health etc) requires several conditions for success. women and men.4 Training of and information for rural women As regards training. However. nutrition. Loans are one of the tools used in a general rural development policy. They are consequently an extremely important element for implementing rural policies and defending the interests of all farmers. political. This would enable them to have real control over the use of these facilities. It is very important for rural women to have full and direct access to the different services as members in their own right and not as wives of member farmers. working towards solving the various economic. techniques. As they are independent and democratically operated. setting up such a program of associating savings/loans for the development of other income-generating activities or parallel activities (training. to their different activities and to their daily 58 .
First of all.planning (schedule and length of meetings are an important element in optimizing the presence and participation of rural woman). the poor save and hence microfinance should provide both savings and loan facilities. A promising 59 . Under these conditions. Secondly. Agricultural organizations must therefore take into consideration the issues of rural women when drawing up policies which are more in keeping with their needs and requirements and thereby reducing the existing inequalities between men and women's access to their various facilities. A main conclusion of this paper is that microfinance can contribute to solving the problem of inadequate housing and urban services as an integral part of poverty alleviation programs. 12. attaining financial viability and sustainability is the major institutional challenge. Conclusion Some valuable lessons can be drawn from the experience of successful Microfinance operation. These two findings imply that banking on the poor can be a profitable business. Deposit mobilization is the major means for microfinance institutions to expand outreach by leveraging equity. the poor repay their loans and are willing to pay for higher interest rates than commercial banks provided that access to credit is provided. In order to be sustainable. microfinance lending should be grounded on market principles because large scale lending cannot be accomplished through subsidies. The solidarity group pressure and sequential lending provide strong repayment motivation and produce extremely low default rates. The challenge lies in finding the level of flexibility in the credit instrument that could make it match the multiple credit requirements of the low income borrowers without imposing unbearably high cost of monitoring its end-use upon the lenders. However. finance can have a considerable direct impact on the life of farming families and on women in particular.
3 of Development Finance Impact 60 .com 5.wikianswers. Eventually it would be ideal to enhance the creditworthiness of the poor and to make them more "bankable" to financial institutions and enable them to qualify for long-term credit from the formal sector. www. Jaipur 2.hindu.coolavenues. Article by N. Bibliography: WEBSITES 1. Working Paper No. Careful research on demand for financing and savings behavior of the potential borrowers and their participation in determining the mix of multi-purpose loans are essential in making the concept work.littleindia. www.org 2. www.com 9. www. Consumption loan is found to be especially important during the gestation period between commencing a new economic activity and deriving positive income. Microfinance institutions have a lot to contribute to this by building financial discipline and educating borrowers about repayment requirements.com 4.indianmba. www. www. housing improvement and consumption support. www.microfinancegateway.com 6.Kavitha (SSM College of Engineering.org 7.com 8. Komarapalyam) 3. Centre for microfinance.wikipedia.thehindubusinessline.com 3. www.solution is to provide multi-purpose loans or composite credit for income generation. www.com JOURNALS AND MAGAZINES 1.wikipedia.
Assessment planning workshop 4.Sustainability of Microfinance Self Help Groups in India: Would Federating Help (2005) 5. Rajesh: The Indian Microfinance Experience-Accomplishments and Challenges (2004) 61 . Ajai Nair. Chakrabarti.
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