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Globalization is an emerging world phenomenon. Developed countries are excited about tapping into resources and cheap labor markets in the poor countries. While the latter are happy to benefit from technological advancements through association with the former. National leaders enthuse over progression in technology and the subsequent enhancement of living standards. Developing countries are finally exposed to the modern era gadgets like lap tops and cell phones, I-pods and air conditioning, palm pilots and pagers. Just a few decades ago ours was a world of distinct economic spheres, different languages, divided cultures and values, fragmented leadership, and separate currency. But today, continents such as Africa and Asia are developing at an incredible pace, national currencies have fused in Europe, English has transpire as the world language, China is emerging as an intimidating world power, the European Union is uniting its countries. It seems as though in future all nations will be united under one language, one currency, one leader, and one global market.
But there are many nations who suffer the consequences of globalization. While developing countries rapidly expand; they have left behind a large portion of their people deprived. The gap between the rich and the poor continues to grow at an alarming rate. Poverty estimates published by the World Bank reveal that 1.4 billion people in the developing world (i.e.one in four) were living on less than US$1.25 a day in 2005.
The rich may enjoy the benefits of globalization, but it is the poor who silently bear the burden. Poor, the one who is victim of poverty is facing five clusters of disadvantages: lack of assets, physical weakness, isolation, vulnerability and powerlessness. Poverty is not simply an economic phenomenon, it is also a social, cultural and psychological phenomenon. Poverty, as a concept, describes the general condition of people who are worse off, and encompasses many aspects of disadvantages. Primarily poverty has been understood as material deprivation, as living with low income and low consumption. That primarily is characterized by both poor nutrition and poor living conditions. However, it is easy to observe that income poverty in most cases is associated with so-called human poverty-the low health and education levels that are either the cause or the result of low income. Income and human poverty also tend to be accompanied by such social deprivations as high
vulnerability to adverse events (World Bank Report). However, as a multidimensional phenomenon the broader definition of poverty leads to a clearer understanding of its causes and aiming to reduce poverty with more comprehensive policy. For example, in along with
the issues of and income distribution and economic growth1, it brings to the fore equitable
access to health and education services and development of social security schemes. Dreze and Sen describe poverty as a severe failure of basic capabilities. To be poor implies: (1) an inability to obtain basic needs i.e. food, shelter or health as a consequence of low income and insufficient access to productive resources and assets; (2) lack of opportunities to utilize human resources owing to inadequate access to education and health care; (3) isolation owing to physical conditions and/or inadequate education; (4) lack of status and power, making it difficult to influence one's own situation and break out of poverty; and (5) a high degree of vulnerability due to lack of productive assets, high potentiality of exposure to natural disasters, and other factors (Rajashekhar,2002).
The poorest and poverty alleviation has become the object of concern nowadays both at national and international levels. And both the national and international communities have committed to the targets set by both the OECD's (Organisation for Economic Co-operation and Development) International Development Goals and, most recently, the MDGs (Millennium Development Goals) which focus on poverty alleviation for those living on less than a dollar a day.
According to the report of MDG one third of deaths - some 18 million people a year or
50,000 per day - are due to poverty-related causes, i.e. 270 million people since 1990, the majority of women and children, roughly equal to the population of the US (Reality of Aid
2004). Also every year more than 10 million children die of hunger and preventable diseases
- which is over 30,000 children per day and one every 3 seconds (WHO, 2003). Further among these poor communities, one child in every five does not live to see his or her fifth birthday. A study in 2006 showed that the ratio of the income between the 5% richest and 5%
poorest of the population is 74 to 1 as compared to the ratio in 1960, which was 30 to 1
1 Quantitative change or expansion in a country's economy. Economic growth is conventionally measured as the percentage increase in gross domestic product (GDP) or gross national product (GNP) during one year. Economic growt h comes in t wo forms: an economy can either grow "extensively" by using more resources (such as physical, human, or natural capital) or "intensively" by using the same amount of resources more efficiently (productively). When economic growt h is achieved by using more labor, it does not result in per capita income growth. But whe n economic growth is achieved through more productive use of all resources, including labor, it results in higher per capita income and improvement in people's average standard of living. Intensive economic growth requires economic development. (source: www.worldbank.org)
(Mohammad & Rahaman, 2007). This indeed reflects the urgent need for development and
spade of the tool which will help to overcome the issue.
Figure 1.1: Percentage population living on less than $1.25 per day (2009).
As per world bank statistics we can observe that , geographically most of the world's poor live in South Asia (over 40 percent), Sub-Saharan Africa (almost 25 percent), and East Asia (about 23 percent). Also almost half of the world's poor live in world's two large countries-- China and India. However, the highest incidence of poverty is observed in Sub-Saharan Africa. That is almost half of its population living below the $1 poverty line
Many different factors have been cited to explain why poverty occurs (Iran Daily, 2006). The notable factors include the following:
Poor, failed, or absence of an infrastructure; Lack of opportunities;
State discrimination and corruption (abuse of public power); Lack of social integration;
Competition instead of cooperation;
Natural disasters; Substance abuse; Procrastination;
Natural factors such as climate or environment;
Historical factors, for example imperialism and colonialism; Overpopulation, war, lack of education and social skills;
Cultural causes, individual beliefs, actions and choices, mental diseases, rural migration to urban areas and disability etc.
Understanding the multiple dimensions of poverty, we can observe the following inter-related connection between poverty and its consecutive effects:
The poor person will not be able to take care of his health properly. Due to poor health, disease and resulted disability it will not be possible for them to work full time. This will limit their income generating capacity and their ability to work to move out of poverty. This indicates the direct relationship between poverty, health problems and ultimately income problems. However more severely, the illness of whole family may ruin an entire household.
Another consequence of poverty is deprivation from formal education. And due to less formal education, poor people are more likely to hold poorly paid jobs or to be unemployed. It is evident that poor families often face huge difficulties in giving their children formal education in school due to the expenses. As a result, the next generation being poorly educated there is a very high possibility that in turn the family again end up holding similar poorly paid jobs.
It is observed that in many countries women wit h children constitute the majority of the poor (UN Report). However where women can come out of poverty their children are expected to have a brighter future, but their chances are limited as poverty is transmitted intergenerationally. In several cases, girls have higher dropout rates as they are the first to be pulled out of school to help with household work and childcare. However experience has shown that investment in education for girls' and women not only makes for greater equity but also tends to transform directly into better nourishment for the family along with better health care and potentially greater economic empowerment.
Considering the above facts, worldwide, the fight against poverty is regarded as a social goal by all countries. More or less all of them have tried to establish dedicated institutions or departments working to this end by means of reducing poverty through the promotion of economic growth. This is because economic growth is fundamental for poverty reduction, and in principle, growth as such does not seem to affect inequality. This is also because high initial income inequality is a brake on poverty reduction and poverty itself is also likely to be a barrier for its reduction.
In India too, the number of people living on less than one dollar a day has come down but there are a large number of people living just above the poverty line of deprivation and their numbers are not falling. At the beginning of the new millennium, 260 million people in India did not have income to access a consumption basket which defines the poverty line. Of these,
75 per cent were in the rural areas. India is home to 22 per cent of the world's poor. Such a high incidence of poverty is a matter of concern in view of the fact that poverty eradication has been one of the major objectives of the development planning process (Ansari Z. and Sohail S., 2012). But fortunately high GDP growth in India has substantially reduced poverty. However, still economists worry that the gap between the countries's rich and poor is widening as well (World Bank, 2012). Hence, to achieve a higher rate of poverty reduction, India will also need to address inequalities in opportunities that obstruct the poor from participating in the growth process (World Bank report 2008).
Wit h total population of just over 1.2 billion, India is the world's largest democracy. In the last decade, India has witnessed accelerated economic growth and has emerged as a global player with the world's fourth largest economy in purchasing power parity terms. Also has made significant progress towards achieving most of the Millennium Development Goals. Wit h the implementation of various government schemes, resources generated from recent growth are now being invested into a set of very ambitious programs to deliver services to the poor. These include programs like elementary education, basic health care, rural roads and rural connectivity, and various other services to the poor. Among all these initiatives, Microfinance emerged as a noble substitute for informal credit and an effective and powerful instrument for poverty reduction among people who are economically act ive but financially constrained and vulnerable in various countries (Intersectoral J., 2003; Morduch and Haley
1.2 FINANCIAL SERVICE FOR THE POOR
As mentioned by Matin, Hulme and Rutherford (2002), there are two features that have significance in shaping poor people's use of financial services in the economic environment.
The first indicates that as poor people operate in a tiny-economy in which production, consumption, trade and exchange, saving, borrowing and income earning occur on very small scale. This results in higher transaction costs (both direct and indirect) as the 'unit' of transaction is generally very small. This has significant implications for the use of formal sector institutions where the charges laid on standardized administrative cost will usually make transactions unattractive to the poor.
The second characteristic represents the higher levels of insecurity and risk in financing to poor people. These occur as flows of income and expenditure usually do not coincide, because of household-specific factors like loss of earnings through sickness, insecure conditions of employment, urgent medical expenses, premature death, difficulties of contract Enforcement etc and in another category of broader environmental factors like natural hazards, crop failure due to flooding or drought, nationwide economic crisis, failure of bank in the formal sector etc.
These characteristics have number of consequences:
(i) Limitation of poor people in interactions with formal financial institutions.
(ii) They promote strategies of risk-spreading by the poor which encourage diversification of economic activities and the development of financial relationships with system of individuals, groups and organizations.
(iii) They also lead to the use of savings and credit mechanisms by the poor as substitutes for insurance so that services like savings, credit and insurance cannot be treated as 'separate' identities.
It is observed that misconceptions still prevail considerably in the financial markets of the poor. The first and most prevalent is that the poor do not or cannot save. Generally, the poor people are considered as 'wasteful, immoral and irrational' (Matin, Hulme and Rutherford,
2002). A second image reflecting perception regarding poor holds that they cannot save because: 'they spend all their income and still don't get enough to eat.' In contradiction, it is observed that in such survival uncertainties the poor need to and do save. Such an image gives rise to the general view that the poor in broad cannot save, and leads to an over- emphasis on the promotional role of financial services as credit for investment.
About 90 percent of the people in developing countries lack access to financial services from institutions, either for credit or savings2, which further fuels the "Vicious Cycle of Poverty" (Vincent, G. 2005). Understanding the cycle, if the people of least developed or developing countries have a limited capacity to invest in capital, productivity is restricted. As the productivity is restricted, incomes are inhibited. And as a result, domestic savings will remain
low. And again, as a result, any increases in productivit y are prevented.
Importantly, researchers have found that there is a strong positive relat ionship between economic growth and poverty reduction. For example, the fastest growing economies like East Asia (including China) reduced the share of its population living below the international poverty line from about 29 percent in 1990 to about 15 percent in 2000 (world bank data). Interestingly, in China only, almost 150 million people were lifted out of poverty. But the countries having negative growth of GNP per capita like Sub-Saharan Africa, during that period, both the incidence of poverty and the absolute number of poor people increased--from
47 percent to 49 percent and by 74 million. This clearly justifies the direct correlation between economic growth and poverty reduction.
Economists by and large assume that there is a direct relationship between people's willingness to save for future consumpt ion with their incomes. As the former one increases so the later one. It seems natural that the poorer people are, the less they can afford to plan for the future and save. Thus in poor countries, where most incomes have to be spent to meet current-often urgent-needs, national saving rates tend to be lower (World Bank).
Achieving balanced and inclusive economic growth is one of the key challenges faced by
Policymakers in countries around the world. The gains of economic growth are accessible to a greater extent by the relatively advantaged, who find it easier to participate in the growth
Robinson, Marguerite S., 2002, "The Microfinance Revolution: Sustainable Finance for the Poor"
process (Kamath, 2009). Poorer people, separated by distance from the urban areas where economic activity is concentrated, have to wait much longer to reap the benefits of economic growth. Engaging these sect ions of society in the economic mainstream is very essential for achieving balanced growth. This is very critical for the long-term sustainability of social development and economic prosperity of country. Access to financial services is a key element in the process of socio-economic empowerment. Only by delivering financial services to people in rural areas and lower income strata can they be brought within the ambit of economic activity. This will help realise the full potential of the country's physical and
human resources be realized.
Vicious circle of Poverty
As explained by Mosley & Verschoor (2003), the persistence of poverty and therefore of chronic poverty - in developing countries rests in the idea of the 'vicious circle of poverty'. It indicates that poor people are not able to take any significant action which will pull out them from poverty because they are poor. The concept of the vicious circle of poverty takes many forms, since the characteristic of poverty which makes break out difficult may be due to poor health, lack of self-confidence, lack of skill or support mechanisms, lack of physical assets or borrowing power, remoteness from markets and institutions, or combinations of the above. However in any country or environment one main element in many versions of the spiral is the phenomenon is 'risk aversion': if poor individuals are risk-averse to the level that they are not willing to invest in the procurement of modern assets because that involves
element of risks and they will remain poor. But with willingness to climb the 'ladders out of poverty' - processes of investment in physical, social and even human capital - being confined to those who are economically secure and in control of sufficient risk taking ability.
To achieve balanced and inclusive economic growth is one of the key challenges faced by Policymakers in countries around the world. The gains of economic growth are accessible to a greater extent by the relatively advantaged, who find it easier to participate in the growth process (Kamath, 2009). Poorer people, separated by distance from the urban areas where economic activity is concentrated, have to wait much longer to reap the benefits of economic growth. Engaging these sect ions of society in the economic mainstream is very essential for achieving balanced growth. This is very critical for the long-term sustainability of social development and economic prosperity of country. Access to financial services is a key element in the process of socio-economic empowerment. Only by delivering financial services to people in rural areas and lower income strata can they be brought within the ambit of economic activity. This will help realise the full potential of the country's physical and human resources be realized.
As per the view of Seibel, H. (1996), in majority of Asian countries, access to formal financial services has been a matter of concern to large numbers of people. Many governments have attempted to respond positively to address this concern by incorporating financial system reforms. Also attempts have been made to match the demand of the people for adequate financial services for financial stability and economic growth. In attempt to achieve this, they have started to deregulate the interest rate regime, to adjust the legal framework including the banking law, made attempts to transform financial institutions into effective intermediaries, to offer opportunities to local people to establish and own their own financial institutions, and to encourage sound banking practices. It is also being accepted that only a harmonious balance between the interests of governments, financial institutions and the people including the poor will lead to equitable and sustainable growth.
Statistics indicates that more than one billion poor people in the world are still excluded from the formal financial systems because they are considered to have a high default rate and normally because of the lack in guarantee and collateral (Hong Son, 2007). But there are also many other reasons involved for which commercial banks are not willing to finance poor. The reasons include lower literacy rates among them with even lesser proper
experience and training and also high expenses on transactions of small loans and lower rates of profit. Therefore limited options to access loans lead to push the poor people into more poverty. Such situations have resulted in innovative concept of micro lending and Microfinance. Microfinance therefore is a way to finance people, those who have no collateral or any property for guarantee. Microfinance is a way of financing to poor for their businesses, to alleviate from poverty, empowering them and giving social benefits in a sustainable way.
Poverty reduction requires actions in multiple sectors. To expand the economic opportunities and the productive potential of the poor, both the productive capital (human, physical, and financial) and the business and institutional environment need to be improved. The development of the financial sector is essential as it facilitates asset accumulation, efficiency of risk management, and increased opportunities for entrepreneurial development. For the poor, there is a potential for a virtuous cycle between increased access to financial sector activit ies, greater investment in human capital, and reductions in poverty. Accordingly, improving financial services has to be a key component of a strategy for opening entrepreneurial opportunities and in turn reducing poverty (Tejerina, Bouillon & Demaestri,
As per UN report, it is observed that despite economic growth, poverty levels remained stagnant or increased. It became well evident that growth by itself does not reduce poverty, and macroeconomic recovery does not necessarily translate into significant social improvement. This has emphasized Governments and lending institutions to create or support financial inclusion programmes to fight with poverty. Various tolls of poverty reduction programmes can now be found in most of the developing countries. They include instruments such as conditional cash transfers; microfinance and employment guarantee schemes for rural people catering to workers need outside the formal economy.
Generally financial intermediations are low in case of developing countries. It is because as a matter of fact, commercial banks find it unprofitable to operate in remote rural areas. This has resulted in absence of a formal market for lending and borrowing. Even though in the areas where commercial banks are there, people living in poverty are excluded from the system considering the lack of asset ownership which is required as collateral and lack of good credit histories. Therefore, the poor and those people living in remote areas are forced to borrow
money from moneylenders at very high interest rates. Fortunately, the microcredit or microfinance movement initiated by Dr. Muhammad Yunus has sought to address the credit needs of people living in poverty.
Microfinance is a form of financial development that has its primary aim to alleviate the poverty (Michael, 2005). Governments, donors and NGOs around the world responded enthusiastically with plans and promised to work together towards the realization of these goals. In recognition of Microfinance, the UNO celebrated the year 2005 as a year of micro- credit, as a result this financing instrument is perceived worldwide as a very effective mean to fight against hunger and poverty, mainly in developing countries.There is ample evidence to support the positive impact of Microfinance on poverty alleviation as it fully relates to six out of seven MDGs. In particular, there is overwhelming evidence substantiating the beneficial effect on income smoothing and increases to income. It is an instrument that, under the right conditions, fits the needs of a broad range of the population, including the poorest, those in the 'bottom half' of people living below the poverty line.
As noted by microcredit pioneer and Nobel Laureate Professor Mohammed Yunus (2003): "Microcredit is not a miracle cure that can eliminate poverty in one fell swoop. But it can end poverty for many and reduce its severity for others. Combined with other innovative programmes that unleash people's potential, microcredit is an essential tool in our search for a poverty-free world" (UN Report, 2010).
There is also growing consensus worldwide that microfinance can help people living in poverty to maintain their consumption level over periods of unexpected crises or cyclical downturns. In this context if consumption or expenditure incurred by poor parents to send their children to school, or buy essential medications, and maintain the nutritional intake of their children, then microfinance is likely to have positive long-term impacts on productivity and hence on poverty (UN Report, 2010).
1.3 HISTORICAL PERSPECTIVE OF MICROFINANCE
The concept of Microfinance is not recent. Worldwide savings and credit groups have operated for centuries. These include the "susus" of Ghana3, "chit funds" in India4, "tandas" in Mexico5, "arisan" in Indonesia6, "cheetu" in Sri Lanka7, "tontines" in West Africa8, and "pasanaku" in Bolivia9, as well as numerous savings clubs and burial societies.
We can trace the roots of the microcredit from the Catholic Church in 15th century Europe (Pantelic, 2008). In 1462, an Italian monk started a pawn shop as a substitute to the "usury practices" of moneylenders. In order to cover the operating expense, Pope Leon X allowed these shops to charge some interest. Also, in the 1700's, Jonathan Swift init iated the Irish Loan Fund System. Here he provided small loans to farmers with no collateral. Within next
140 years i.e. by 1840 there was almost 300 such loan fund systems were established
3 Susu collectors are one of the oldest financial groups in Africa. Based largely in Ghana they provide (for a small fee) an informal means for Ghanaians to securely save and access their own money, and gain limited access to credit,. Money looked after for an individual by a Susu collector is held in a Susu account. A Susu collector can often be recognized by his distinctive coat of many pockets.
4 The chit fund schemes have a long history in the southern states of India. In a chit scheme, a specific number of individuals come together to pool a specific amount of money at periodic intervals. Usually the number of individuals and the number of periods will be the same. At the end of each period, there will be an auction of the money. The word 'chit' is from Hindi and refers to a small note or piece of something
5 The tanda is a form of rotating credit association and a monetary practice. The term "rotating credit
associations" refers to "an association formed upon a core of participants who agree to make regular contributions to a fund which is given in whole or in part to each contributor in rotation" In Mexico, the origins of the tanda involve the need for the people of the working class, and in some cases the middle class, to rotate scarce resources (money) among themselves.
6 In Indonesia, the Arisan system is a traditional Indonesian savings collection and loan distribution system, similar to the ancient Chinese design. The Arisan system collects funds from participants who wish to receive a loan in national currency to start a local enterprise or cooperative. Participants bid on loans by making presentations on their business idea. A list is created and members take turns receiving and repaying loans with
a repayment rate of a flat 15% on the amount of the loan. Each participant is responsible for ensuring the success of each business that is started so that each borrower can repay their loan. Through successive cycles, the Loan Fund grows larger in order to broaden the range of micro-loan borrowers, or to provide larger-scale loan amounts, depending on the local economic situation.
7 In Sri Lanka, Cheetus (savings clubs) are an example of self-managing savings groups or clubs in which
women contribute an agreed sum at regular intervals. The pooled amount is distributed in an agreed order. The cheetu system originated in India and can be found in various forms throughout Sri Lanka and most of Asia. Rice, gold and money cheetus vary in amount and detail depending on the participants' needs.
8 The tontines of West Africa can be traced back to 17th-century Europe and are named for the Italian banker Lorenzo de Tonti. The basic concept is simple. Each investor pays a sum into the tontine. Each investor then receives annual dividends on his capital. As each investor dies, his or her share is reallocated amongst the surviving investors. This process continues until only one investor survives. Each subscriber receives only dividends; the capital is never paid back. The proceeds of the subscription were used to fund various private or public works projects.
9 Pasanaku means "passes between us" It is a very old system of group monetary support. A group of people, usually women, get together and arrange out a schedule of turns where each month a new member comes up as the group beneficiary. Every month the group gathers and every member puts in the same amount, agreed upon, at the beginning. That month's beneficiary takes home the pot to use for whatever she pleases; she can use it to augment her business, pay tuition for her children, or throw a party, anything that she wants. At the end of the cycle, once every woman has had her turn benefiting from the pot, the group is finished and can disband or decide to go for another round. It can add new members or say goodbye to old ones, change the monthly payment amount or the payment period but all only in between cycles.
throughout Ireland. The reach of the scheme was approximately 20% of all Irish households yearly. In the 1800s in Germany, Friedrich Wilhelm Raiffeisen developed the idea of the financial cooperative to "help the rural population break from their dependence on moneylenders and to improve their welfare." The program picked up momentum within the country and then expanded throughout Europe, North America, and developing countries and created the foundation for today's cooperatives offering financial credit. In Indonesia, the Indonesian People's Credit Banks or The Bank Perkreditan Rakyat (BPR) opened in 1895.
The BPR became the largest Microfinance system in Indonesia with close to 9,000 units. In the early 1900s, various adaptations of these models began to appear in parts of rural Lat in America. While the goal of such rural finance interventions was usually defined in terms of modernizing the agricultural sector, they usually had two specific objectives: 1) increased commercialization of the rural sector, by mobilizing "idle" savings and increasing investment through credit, and 2) reducing oppressive feudal relations that were enforced through indebtedness. In most cases, these new banks for the poor were not owned by the poor themselves, as they had been in Europe, but by government agencies or private banks. Over the years, these institutions became inefficient and at times, abusive.
Between the 1950s and 1970s, American governments and donors focused on providing agricultural credit to small and marginal farmers, in hopes of raising productivity and incomes. These efforts to expand access to agricultural credit, emphasized supply-led government interventions in the form of targeted credit through state-owned development finance institutions, or farmers' cooperatives in some cases. These institutions or cooperatives received concessional loans and on-lent to customers at below-market interest rates. These subsidized schemes were rarely successful. Rural development banks suffered massive erosion of their capital base due to subsidized lending rates and poor repayment discipline. Also the funds did not always reach the poor, often ending up concentrated in the hands of better-off farmers.
Meanwhile, starting in the 1970s, experimental programs in Bangladesh, Brazil, and a few other countries extended tiny loans to groups of poor women to invest in micro-businesses. This type of micro enterprise credit was based on solidarity group lending in which every member of a group guaranteed the repayment of all members. These "micro enterprise lending" programs had an almost exclusive focus on credit for income generating activit ies
(in some cases accompanied by forced savings schemes) targeting very poor (often women)
Reviewing the Microfinance in South Asia, The first Microfinance operation started approximately 30 years ago. There are number of institutions, such as donor agencies, international NGOs and research institutions, which have played an important role in developing microfinance programs and institutions by supporting microfinance initiatives financially. They assisted in the microfinance program by creating capacity building and good governance practices etc. The widely known MFIs established in the late 1970s are Grameen Bank and Bangladesh Rural Advancement Committee (BRAC). In the early 1980s the Grameen Bank became a private sector bank and with a limited license the BRAC became a non-government organization (NGO). These two institutions have had a global influence as there have been many successful attempts at replicating them in other developing countries (Remenyi, 1997).
In India, Microfinance started in the early 1980s. It has been initiated with forming informal self-help groups (SHG) to provide access of credit to poor people. Gradually, from this small beginning, the microfinance sector has grown with very high pace in the last decade. There is a significant contribution in the direction from National bodies like the Small Industries Development Bank of India (SIDBI) and the National Bank for Agriculture and Rural Development (NABARD) in terms of providing time and financial resources to microfinance. The strength of the Indian microfinance organizations (MFOs) is in its ability to adopt verit ies of approaches and forms that have evolved over time. In addition to the Indian origin models of SHGs and mutually aided cooperative societies (MACS), the country has learned from other microfinance experiments across the world, particularly those in Bangladesh, Indonesia, Thailand, and Bolivia, in terms of delivery of microfinancial services (Sriram, M. and Upadhyayula, R, 2002). The organizations engaged in microfinance activities in India may be categorized as the Wholesalers, NGOs supporting Self Help Group Federations (SHGF) and NGOs directly retailing credit borrowers or groups of borrower (Qayyum, A and Ahmad, M., 2006). The organizations which provide credit to the microfinance system through NGOs include the National Bank of Agriculture and Rural Development (NABARD), Rashtriya Mahila Kosh-New Delhi and the Friends of Women's World Banking in Ahmedabad. However, the NGOs that are supporting the SHG Federations include Self- help Women's Association (SEWA) in Ahmedabad, MYRADA in Bangalore, ADITHI in
Patna, SPARC in Mumbai, and the Association for Sarva Seva Farms (ASSEFA) in Madras, PRADAN in Tamilnadu and Bihar, the Small Industries Development Bank of India (SIDBI) and the Tamil Nadu Womens' Development Corporationetc. The NGOs that are directly enhancing credit to the borrowers include SHARE in Hyderabad, ASA in Trichy, RDO Loyalam Bank in Manipur (Tiwari and Fahad, 2004).
1.4 DEFINING MICROFINANCE
The broad definition of Microfinance as provided by Robinson (1998) is, 'Microfinance refers to small-scale financial services for both credits and deposits -that are provided to people who farm or fish or herd; operate small or micro enterprises where goods are produced, recycled, repaired, or traded; provide services; work for wages or commissions; gain income from renting out small amounts of land, vehicles, draft animals, or machinery and tools; and to other individuals and local groups in developing countries, in both rural and urban areas'.
Also according to Wong10 inter alia, Microfinance may be defined as "those activities aimed at providing very small loans and saving opportunities to low-income segments of society."
On the other hand, Bárbara Mena11 considers that microfinance is generally refers to
as the "provision of financial services, such as loans, savings, insurance or transfer services to low-income households".
Similarly, the Microcredit Fund (FCM - Fondo para la Concesión de Microcréditos) and the Spanish International Cooperation Agency (AECI - Agencia Española de Cooperación Internacional), define microfinance as "the provision of financial services (credit, savings, insurance, payment intermediation, transfer services,...) to those sectors of the population that generally have no access to these services or who find that such services are not designed to adequately meet their needs. Microfinance services should be designed to meet the needs and match the capacity of the people at whom they are targeted and,
therefore, it is necessary to implement procedures specifically designed to that end."
10 WONG, D. (2000) "Estado Actual de las microfinanzas". http://www.docentes.up.edu.pe/DWong
11 MENA, B (2003) "Microcréditos: un medio efectivo para el alivio de la pobreza". Cambio Cultural. http://www.cambiocultural.com.ar/investigación/microcredito.htm
Also defined by David C and Juan L (2009), Microfinance can be defined as "a set of financial and banking activities, such as credit, savings, insurance, mortgages, etc. targeted at low-income individuals with no capacity to access financial services, aimed at enabling them to move out of poverty by developing and running a small-scale entrepreneurial activity."
According to International Labor Organization (ILO), "Microfinance is an economic development approach that involves providing financial services through institutions to low income clients".
In India, Microfinance has been defined by "The National Microfinance Taskforce, 1999" as "provision of thrift, credit and other financial services and products of very small amounts to the poor in rural, semi-urban or urban areas for enabling them to raise their income levels and improve living standards".
The Task Force under the Chairmanship of Shri Y. C. Nanda, (NABARD) has suggested a working definition of microfinance as "provision of thrift, credit and other financial services and products of very small amounts to the poor in rural, semi-urban or urban areas for enabling them to raise their income levels and improve living standards".
However, Microfinance is generally understood but not clearly defined in India (Sriram & Upadhyayul, 2002). For example, if an SHG gives credit for carrying out an economic activit y, it is viewed as Microfinance. But if a commercial bank gives a similar kind of loan, it is unlikely that the same will be considered as Microfinance.
In the Indian context there are some value attributes of Microfinance:
Microfinance is an activity undertaken by the alternate sector mostly NGOs. Hereby, a loan given by a market intermediary to a small borrower is not seen as Microfinance. However when an NGO gives a similar loan it is treated as Microfinance. It is assumed that Microfinance is given with a laudable aim, and also has institutional and non exploitative intentions. Therefore, we define Microfinance not by form but by the intent of the lender.
Microfinance is something done specifically for the poor. Banks usually do not qualify to be Microfinance Organizations (MFOs) as they do not predominantly cater to the poor. However, there is ambivalence about the regional rural banks (RRBs) and the new local area banks (LABs).
Further, Microfinance grows out of developmental roots. This can be termed the "alternative commercial sector." MFOs classified under this head are promoted by the alternative sector and target the poor. However these MFOs need not necessarily be developmental in incorporation. There are MFOs that are offshoots of NGOs and are run commercially. There are commercial MFOs promoted by people who have developmental credentials. We do not find commercial organizations having "Microfinance business."
Lastly, the Reserve Bank of India (RBI) has defined Microfinance by specifying criteria for exempting MFOs from its registration guidelines. This definition is limited to not-for-profit companies only.
1.5 PRINCIPLES OF MICROFINANCE
Some principles that summarize a century and a half of development practice were encapsulated in 2004 by Consultative Group to Assist the Poor (CGAP):
Â§ Microfinance must be useful to poor households: helping them raise income, build up assets and/or cushion themselves against external shocks.
Â§ "Microfinance can pay for itself." Subsidies from donors and government are scarce and uncertain, and so to reach large numbers of poor people, microfinance must pay for itself.
Â§ Poor people need not just loans but also savings, insurance and money transfer
Â§ Microfinance means building permanent local institutions.
Â§ Microfinance also means integrating the financial needs of poor people into a country's mainstream financial system.
Â§ The job of government is to enable financial services, not to provide them."
Â§ "Donor funds should complement private capital, not compete with it."
Â§ "The key bottleneck is the shortage of strong institutions and managers." Donors should focus on capacity building.
Â§ Interest rate ceilings hurt poor people b y preventing microfinance institutions from covering their costs, which chokes off the supply of credit.
Â§ Microfinance institutions should measure and disclose their performance - both
financially and socially.
These principles were endorsed by the Group of Eight leaders at the G8 Summit on June 10,
1.5.1 MICROFINANCE DELIVERY MODELS : AT A GLANCE
Globally, the evolution of the Microfinance industry has taken place basically through two approaches. The Latin American mode or the Commercial model and the South Asian model (Nair, 2005). In South Asia various models like Grameen type, Cooperatives, Self Help Groups etc. have been developed. Different South Asia based models have been briefly explained as follows:
18.104.22.168 THE LATIN - AMERICAN MODEL
As noted by Lim D. (2009), the Latin American model is carried out in the form of individual lending (opposed to groups) primarily focused on maximization of profit and has objectives are nearly aligned with financial institutions in developed economies. There are a variety of difference of the Latin American model however all of them employ a common measurement of success that is largely through the earnings, performance and ownership. Hence it is more similar to "commercial" MFIs, justified by raising required capital through IPOs or private equity investors. One of the examples is Banco Compartamos - a Mexican Microfinance firm that had a successful initial public offering (IPO) in 2007. However this has been criticized by Mohammad Yunus and others experts for charging interest rates of nearly 100% a year. It seems that the Latin American model has a commercial orientation in its operations, motivated by financial performance, financing and ownership contract.
In this model, if the loan size involved is smaller, the character of borrower will become more important as the borrower's ability and willingness to pay back will be the key to the sanction
of a loan applied. Before sanctioning loan, the concern officers of the Latin American model evaluate the applicant and his/her respective business. This model is more responsive to borrower's demand and exhibit more adaptability in formation of its services to customers. As this model is highly commercial in nature, the MFIs dealing with this model have higher urban concentration of borrowers (especially urban centres of developing cities). There is a high degree of diversity of customers as this model offers products as per clients needs. Also clients feel valued with high loyalty and trust in Latin MFIs.
22.214.171.124 THE ASIAN MODEL
The Asian model is replication of the Grameen model of microfinance, which was founded by Prof. Muhammad Yunus. The Grameen model advocates micro credit to the poor, especially women with the prime belief that there are least chances of default compared to man due to children obligations. Here, credit and banking facilities are made available to groups of women, and repayments rates are ensured through detailed analysis of proposed activity, social and group pressures. Financing is obtained from banks and donors and a spread is added on top of the cost of funding to microcredit borrowers. Management of MFIs make attempts to reduce the organization's cost of financing, distribution, and operating efficiency to reduce interests charged to borrowers of microfinance. The Asian model of microfinance is considered as a double bottom-line company, due to its ability to serve dual objectives (1) social objective of reducing poverty and (2) profit seeking objective. Both the goals of MFIs are weighted equally and performance is evaluated through the fulfillment of nonfinancial mission. Members and micro clients are the owner's of this type of double bottom-line companies and each member and borrower has a stake in the. Compared to Asia, whereby only members have a stake in the MFI, in India, this structure of both and member and loan borrower are having stakes.
Indian MFIs range from Grameen-replicator NGOs to for-profit entrepreneurial ventures to developmental NGOs which moved from Self-Help Group (SGHs) promotion to direct financial intermediation (Lim, 2009).
Indian MFIs can be divided into three categories based on their asset size (CGAP Report). In the first category the institution like SKS, SHARE, SPANDANA will come, who are able to scale up their funds under management considerably due to their ability to attract
commercial capital. These institutions have started their operations in 1990s as NGOs promoting SGHs or Grameen model programs. But after 2000, they have converted themselves into Non - banking finance Companies (NBFCs). However in the second category, both NGOs and for-profit MFIs (mostly NBFCs) will come having high growth rates. Bandhan, Evangelical Social Action Forum (ESAF) and Grameen Koota are the NGOs who have transformed themselves into regulated, for-profit structures. Similarly the third category comprises of those MFIs, equivalent NGOs that are striving to achieve significant growth. It is noted that in India, there are more than 1000 of these kinds of MFIs that offers micro credit with multiple developmental activities, such as micro insurance, and international transmission services etc (Lim, 2009). As costs of management are extremely high, these institutions generally face difficulties in accessing the profitability of their funds,
Comparing Asian Model with the Latin American model in terms of women borrowers, the prior including Africa has more than 60% and the latter has 38% of women borrowers (Lim,
2009). However clients of the Latin - American model are mainly above poverty lines, and carries larger average loan size. Measuring the loan sizes in terms of percentage per capita of GDP, Latin America's loan size is similar to that of Asia. It is important to note that the average loan sizes in Latin - American Model are used as a benchmark for client's characteristics and focus of the model is on sustainability rather than poverty alleviation.
In general, we can observe that in different regions different models of microfinance are driven by a variety of objectives when it comes to the aspect of profitability. The Asian model having the objectives of society and economic development at centre, seem to be more beneficial to the microfinance borrower considering the cost (lower) of borrowing. In other regions it will be difficult to draw similar conclusion considering the different variations adopted by several models.
In the following section the brief introduction of prevailing Microfinance models has been discussed.
126.96.36.199 GRAMEEN MODEL
Grameen Bank concept was born in the village of Jobra, Bangaladesh, in 1976 (Joshee 2008). Here a group consists of five borrowers, with financing lent first to two, then to next two, and
finally the fifth borrower (concept of sequential financing). These groups of five meets together weekly with seven other groups, which makes it easy for the bank staff to meet 40 clients at a time. Here if one member defaults, all in the group are denied subsequent loans.
188.8.131.52 INDIVIDUAL CREDIT LENDING MODEL
This model provides credit access to individual borrowers who are selected on an individual, discretionary basis and often have at least some small form of fixed assets or income (Somanadha & Anup 2007). It takes care of individual credit route for Microfinance where appraisal, loan disbursements & loan repayments as well as saving collections are all done on an individual basis. This mechanism predominantly adopted by the BRI- Bank Rakyat Indonesia, is financially a self- sufficient kind to better off among poor & non - poor households.
184.108.40.206 VILLAGE - BANKING MODEL
The roots of the village banking model is traced back to its origin in Bolivia in the mid 1980s when FINCA12, drawing on experiences from traditional rotating savings and credit associations (ROSCAS)13, engaged local extension agents in the buildup of financial associations (Nelson, MkNelly, Stack & Yanovitch 1996). The NGOs help setup village
financial institutions in partnership with local groups & then facilitate a relationship between the village bank & local commercial banks with an aim to create sustainable institutional structure.
220.127.116.11 SELF HELP GROUP - BANKING MODEL
This is the most popular model in India. The SHG - Bank Linkage Programme was started as an Action Research Project in 1989 (NABARD 2008). SHG banking, or linking banks and self-help groups, in India is the largest and fastest-growing microfinance program in the developing world. The role of NABARD, as the prime mover and refinancing agency, has
12 FINCA stands for the Foundation for International Community Assistance. Established in 1984, FINCA is best known for having pioneered the "Village Banking method"--one of the major forms of microcredit--and for leadership in Microfinance overall. The mission of FINCA International is to provide financial services to the world's lowest-income entrepreneurs so they can create jobs build assets and improve their standard of living.
13 A Rotating Savings and Credit Association or ROSCA is a group of individuals who agree to meet for a defined period of time in order to save and borrow together. "ROSCAs are the poor man's bank, where money is not idle for long but changes hands rapidly, satisfying both consumption and production needs."
been very important for the massive growth in outreach by drawing on a wide array of institutional resources (Seibel, H., 2005). Here an NGO starts the process of group building of voluntarily self - selected individuals who agree, get credit & save. An average SHG would have 15 members - usually poor & mostly women - who pool their savings into a fund from which they can borrow. This is done by opening an account in a regional rural bank or in a commercial bank. The group continues with its savings for an initial period of 6 months after which they can borrow from the accumulated internal funds sequentially. There is strong indicative evidence from various sources that the impact of SHG movement is deeply felt by the women, specifically illiterate (Puhazhendi, V & Badatya, K.C., 2002).
18.104.22.168 CREDIT UNIONS & COOPERATIVES
Credit unions & co-operatives are member owned organizations providing credit & other financial services to their members (Almeyda 2000). The apex bodies provide technical & financial support to the federaling units, SANASA14, of Sri Lanka which is a successful example of rural credit co-operative, a MF business provider.
22.214.171.124 JOINT LIABILITY GROUP
A Joint Liability Group (JLG) is an informal group comprising preferably of 4 to10 individuals but can be up to 20 members, coming together for the purposes of availing bank loan either singularly or through the group mechanism against mutual guarantee (NABARD
2006). The JLG members would offer a joint undertaking to the bank that enables them to avail loans. The JLG members are expected to engage in similar type of economic act ivities like crop production, etc.
1.6 DEFINITIONS AND KEY CONCEPTS
"Providing financial assistance to an individual or an eligible client, either directly or through a group mechanism for:
i. an amount, not exceeding rupees fifty thousand in aggregate per individual, for small
14 SANASA Development Bank is a unique bank committed to uplifting the standards of living for low income
Sri Lankan families with its range of micro finance activities.
and tiny enterprise, agriculture, allied activities (including for consumption purposes of such individual) or
ii. an amount not exceeding rupees one lakh fifty thousand in aggregate per individual for housing purposes, or
iii. such other amounts, for any of the purposes mentioned at items (i) and (ii) above or other purposes, as may be prescribed (NABARD,2008)."
Micro Credit is defined as provision of thrift, credit and other financial services and products of very small amount to the poor in rural, semi-urban and urban areas for enabling them to raise their income levels and improve living standards. Micro Credit Institutions are those which provide these facilities (RBI, 2009).
1.6.3 MICRO FINANCE INSTITUTIONS (MFIS):
"An organisation or association of individuals including the following if it is established for the purpose of carrying on the business of extending Microfinance services:
i. a society registered under the Societies Registration Act, 1860,
ii. a trust created under the Indian Trust Act,1880 or public trust registered under any State enactment governing trust or public, religious or charitable purposes,
iii. a cooperative society / mutual benefit society / mutually aided society registered under any State enactment relating to such societies or any multistate cooperative society registered under the Multi State Cooperative Societies Act, 2002 but not including -
A cooperative bank as defined in clause (cci) of section 5 of the Banking Regulation Act,
A cooperative society engaged in agricultural operations or industrial activity or purchase or sale of any goods and services (NABARD, 2008)."
1.6.4 MICRO INSURANCE:
As defined by the Consultative Group to Assist the Poor (CGAP) working group on micro- insurance defines micro-insurance as "the protection of low income households against
specific perils in exchange for premium payments proportionate to the likelihood and cost of the risk involved" (NABARD).
Empowerment refers to increasing the spiritual, political, social and economic strength of individuals and communities. It often involves developing confidence of the individual in his/her own capacities. It has different meanings in different social, cultural and political contexts. It indicates the expression of self-strength, control, self-power, self- reliance, freedom of choice and life of dignity, in accordance with one's values, capability of fighting for one's rights, independence, own decision making, being free. Empowerment is relevant at the individual and collective level, and can be economic, social, or political.
Poverty is a condition in which a person of community is deprived of the basic essentials
and necessities for a minimum standard of living. Since poverty is understood in many senses, the basic essentials may be material resources such as food, safe drinking water and shelter, or they may be social resources such as access to information, education, health care, social status, political power, or the opportunity to develop meaningful connections with other people in the society.
According to the World Bank (1980 ) poverty is defined as, "A condition of life so characterized by malnutrition, illiteracy, and disease as to be beneath any reasonable definition of human decency (Ghalib, 2007)".
1.6.7 CAPACITY BUILDING:
Capacity building of financial institutions starts with defining the skills required and based on that designing the best package of services. Here, selection of the right technical service providers and delivery mechanisms are crucial. These choices required to take into account the institutions' background like maturity, legal status, size, products, and staff qualifications.
Though various researches are conducted at national and international level on the Microfinance system, there is still a wide scope for strategic implementation of the system that will solve the core issue of providing self employment to the people living below poverty line. Thus the present study is a humble attempt to contribute in the field of Microfinance in general and helping to achieve its core objectives in particular.
The study mainly aims to understand and explore the parameters responsible for sustainable development of Self Help Groups to achieve the objective of poverty removal. For this study, the relevant primary data has been collected from members of Self Help Group and representatives of Microfinance Institutions. The study will be helpful to various MFIs and policy makers to understand the present scenario of Microfinance activity and how the implementation of the said program can be improved upon in such a way that it increases the possibility of achieving the core objectives of Microfinance.